June 06, 2012
This is what readers of a WAPO piece discussing the crisis in Spain must have concluded. The piece noted the financial problems facing Spain’s banks and government, and told readers:
“Only Germany has pockets deep enough to push down countries’ borrowing costs, guarantee fearful depositors’ investments and kick-start listless economies.”
This is not true. The European Central Bank (ECB), like the Federal Reserve Board, has essentially limitless ability to support banks in Spain and elsewhere. Such support would be essentially costless to Germany and the rest of Europe.
While the ECB could act at any time to explicitly or implicitly guarantee the debt of countries like Spain and Italy, which would immediately lower their interest rates to a sustainable level, it has chosen not to go this route. That fact should have been highlighted in a piece like this one.
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