Is the ECB Powerless to Rescue Europe, or Just Unwilling?

1) Marshall Auerback, at New Economic Perspectives, digs into the issue of whether the ECB is legally permitted to engage in the sort of “lender of last resort” activities that many think are key to mitigating this crisis:

The notion that it cannot act as lender of last resort is disingenuous:  The ECB does have the legal mandate under its “financial stability” mandate which was provided under the Treaty of Maastricht.  True it is fair to say that the whole Treaty of Maastricht is full of ambiguity.  The institutional policy framework within which the euro has been introduced and operates (Article 11 of Protocol on the Statute of the European System of Central Banks (ESCB) and of the European Central Bank) has several key elements.  One notable feature of the operation of the ESCB is the apparent absence of the lender of last resort facility, which is an issue raised by the WSJ today, and which Draghi uses to justify his inaction.  But it’s not as clear-cut as suggested: The Protocols under which the ECB is established enables, but does not require, the ECB to act as a lender of last resort.

Proof that the ECB exploits these ambiguities when it suits them is evident in its bond buying program.  The ECB articles say it cannot buy government bonds in the primary market. And this rule was once used as an excuse not to backstop national government bonds at all.  But this changed in early 2010, when it began to buy them in the secondary market.  The ECB also has a mandate to maintain financial stability.  It is buying government bonds in the secondary market under the financial stability mandate.  And it could continue to do so, or so one might argue that it could.  True there is now great disagreement about this within the ECB.  It has been turned over to the legal department, which itself is in disagreement, which ultimately suggests that this is a political judgement, and politics is what is driving Italy (and soon France) toward the brink.

Read the rest here.

2) Brad Plumer of the Washington Post runs down the reasons (with rejoinders from Paul De Grauwe) why the ECB might be unwilling to step in as lender of last resort (hint: the words “inflation” and “moral hazard” come up a lot).