Paul Lachine

Europe’s Central Bank at Sea

Had the ECB known at the start of Europe’s debt crisis that the endgame would be neither simple, nor orderly, it might have resisted risking its balance sheet and reputation. Then again, it probably could not have done otherwise.

NEWPORT BEACH – Central bank purists are confused. How can the European Central Bank, a Germanic institution, now be in the business of buying government bonds issued by five of its 17 members? Why is this monetary authority acting like a fiscal agency? Isn’t the ECB supposed to be a politically independent and operationally autonomous institution committed to fighting inflation and safeguarding the currency?

Well, yes and no. And that answer speaks to the disturbing realities of modern-day central banking (or, to be more exact, central banking in the post-bubble world of debt overhangs and sovereign-debt concerns). It also sheds light on the endgame now taking shape in a confused and unsettled eurozone.

A sea-faring analogy simplifies some of the complexity. Imagine that a highly agile coast-guard vessel is called out to rescue a floundering boat. As the rescue is taking place, the vessel finds that it must also rescue two other, larger boats. It does so, but not before the captain receives assurances that a larger ship is coming to assist.

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