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The Debt Crisis and the European Central Bank’s Role of Lender of Last Resort

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  • Carlo Panico
  • Francesco Purificato

Abstract

While the media and some professional blogs propose austerity policies because the European debt crisis is due to the misuse of public finances by some national authorities, this paper suggests that the existence of national conflicts within the ECB’s governing bodies is the main cause of the crisis. By examining the interventions of the Eurosystem in favour of the Government sector, the paper argues that fiscal policies enhancing growth and reductions in the interest rates on sovereign securities are needed. This requires minimising moral hazard regarding the behaviour of the national political authorities. The literature on the institutional organization of policy coordination contains rich material for the identification of sensible solutions to this problem. Yet, the unfounded fears spread by the media among the taxpayers make it difficult to apply them.

Suggested Citation

  • Carlo Panico & Francesco Purificato, 2013. "The Debt Crisis and the European Central Bank’s Role of Lender of Last Resort," Working Papers wp306, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp306
    as

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    File URL: https://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP306.pdf
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    References listed on IDEAS

    as
    1. Martina Cecioni & Giuseppe Ferrero, 2012. "Determinants of TARGET2 imbalances," Questioni di Economia e Finanza (Occasional Papers) 136, Bank of Italy, Economic Research and International Relations Area.
    2. Hans-Werner Sinn & Timo Wollmershäuser, 2012. "Target loans, current account balances and capital flows: the ECB’s rescue facility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 468-508, August.
    3. Paul De Grauwe, 2010. "The Fragility of the Eurozone’s Institutions," Open Economies Review, Springer, vol. 21(1), pages 167-174, February.
    4. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    5. Carlo Panico & Francesco Purificato, 2013. "Policy coordination, conflicting national interests and the European debt crisis," Cambridge Journal of Economics, Oxford University Press, vol. 37(3), pages 585-608.
    6. Carlo Panico & Francesco Purificato, 2010. "European Policy Reactions to the Financial Crisis," STUDI ECONOMICI, FrancoAngeli Editore, vol. 0(100), pages 191-218.
    7. Valiante, Diego, 2011. "The Eurozone Debt Crisis: From its origins to a way forward," CEPS Papers 5985, Centre for European Policy Studies.
    8. Antonio Fat·s & Ilian Mihov, 2003. "On Constraining Fiscal Policy Discretion in EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 112-131.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Chee-Heong Quah, 2016. "A Diagnostic on the West African Monetary Union," South African Journal of Economics, Economic Society of South Africa, vol. 84(1), pages 129-148, March.
    2. Eric M. Leeper, 2015. "Fiscal Analysis is Darned Hard," Caepr Working Papers 2015-021 Classification-E, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    3. repec:erc:cypepr:v:11:y:2017:i:2:p:19-62 is not listed on IDEAS

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