ECB: the super fire-fighter

A lot of pressure coming from many sides is put on the European Central Bank (ECB) to print money and lend it to banks at a symbolic rate. These in turn could lend it to member states to help them finance their deficits at much more favourable rates than the current market rates. Germany stands by side with the ECB in resisting the pressure.

Here is a simple explanation of both pro and con positions.

The ECB is like a fire-fighter: it intervenes as lender of last resort, printing money for banks when they need it, in order, for example, to prevent a systemic risk. This fire-fighter moves in with a truck loaded with a water tank (money paper). The fire is so fierce (the crisis is so acute) that the tank is not large enough to put out the fire (there is not enough printed money). Those in favour of more printing by the ECB suggest to connect the water pipe to the city water distribution system to have a constant flow of water (let the money printing machine run as long as money is needed). Those camping on the side of the ECB, like Germany, reply:” if you do that, the owner of the house will be tempted not to insure his house at 100% of its value anymore because he will think that whenever there is a fire, the fire-fighter will be there within minutes with plenty of water”.

Both are right.

The solution is to connect the pipe to the city water distribution system, this time, and put out the fire. Then, take as many precautionary measures possible in order to limit damages of future fire breakouts.

The words “this time” are important. Especially in Europe. The USA, which is often quoted as the example to follow by those advocating an unlimited water flow, can afford to have their water pipe permanently connected to the city water distribution system because the US dollar is used worldwide, between other things, to price many basic materials: the excess water flaws abroad (the USA is exporting its inflation with the consequence that the price of bread eaten abroad goes up and is feeding up revolts, mainly abroad).

In Europe, the situation is different. Most of the excess water stays in Europe.

So, before printing an “unlimited amount of money”, it is even as vital for Europe to think, now, on precautionary measures to make sure that member states will, not only on paper but in the facts, rein in their budget deficits.