Saturday, September 10, 2011

Endgame for the Euro?

Paul Krugman hopes not, but he thinks that Jürgen Stark's departure from the ECB may trigger a self-fulfilling doom:
By resigning from the ECB, Juergen Stark has conveyed, deliberately or not, the message that there will be no such lender of last resort, that there isn’t enough political cohesion in the eurozone to stand behind countries under market attack. And this translates directly into soaring spreads for Spain and Italy; the self-fulfilling crisis is on.

1 comment:

FrédéricLN said...

I'm sorry not to approve Mr Krugman, but his way to think is exactly the same as the one Natixis and others big banks advocates exposed during the 2007-2008 crisis.

"Crisis? What crisis? It's just a stupid wave of anxiety across some investors or politicians. They should better keep quiet and go on with business as usual, and all fears will disappear".

Unconveniently, "market attacks" are not the cause of bankruptcy, but its consequence.

Indeed, bankruptcy becomes tangible only when the consequence is drawn, that is, when potential lenders (private banks, ECB or others) must reluctantly admit that "er — we just can't give away to somebody who will never reimburse it!".

But if you open your eyes and state a ship has sunk, should you be held responsible for sinking the ship?

There may be lenders of last resort, there are no donors of last resort, as far as States are concerned.