European Central Bank must go nuclear to save Europe

Tuesday, August 9, 2011
By Paul Martin

A chorus of global economists has called on the European Central Bank to go far beyond pin-prick purchases of eurozone debt.

By Ambrose Evans-Pritchard
Telegraph.co.uk

It needs to launch quantitative easing on a massive scale to head off a eurozone debacle, if necessary purchasing half the entire stock of Italian and Spanish debt, they argue.
Stephen King, HSBC’s chief economist, said the ECB should drop its ideological opposition to QE and embrace easy money in “exactly the same” way as the US Federal Reserve.
“At the heart of the problem is the ECB’s unwillingness to be seen ‘monetizing’ government debt. Yet if the alternative to QE is the collapse of the euro or a descent into depression, then massive expansion of the ECB’s balance sheet seems a small price to pay,” he said.

The ECB should not ‘sterilize’ purchases of Italian and Spanish bonds to offset stimulus but instead allow the liquidity to course through the system. Dr King said the eurozone will have to embrace fiscal union in the end or face the same sort of “fiscal anarchy leading to financial implosion” that destroyed post-Soviet rouble area.
New York professor Nouriel Roubini called on the ECB to reverse monetary tightening immediately given the darkening global picture. “It should reduce rates to zero, and make big purchases of government bonds,” he said.

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