European Rift on Bank’s Role in Debt Relief

European Rift on Bank’s Role in Debt Relief
José Luis Rodríguez Zapatero, Spain’s prime minister, on Thursday became the latest leader to demand that the bank find a solution to the euro crisis, saying that “this is what we transferred power for” and that it had to be a bank “that defends the common policy and its countries.”
Mr. Zapatero made his unusually blunt statements on a day when markets sagged further and contagion continued its seemingly inexorable spread from the small economies on Europe’s periphery to Italy, Spain and even France at the core. Spain was forced Thursday to pay nearly 7 percent on an issue of 10-year debt, the highest since 1997, while investors demanded the largest premium for buying French as opposed to German debt in the decadelong history of the euro.
Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort.
European politicians and analysts say that unbending stance now threatens the survival of the euro and the broader integration of Europe itself.
“There is no solution to the crisis without the E.C.B.,” said Charles Wyplosz, a professor at the Graduate Institute in Geneva and co-author of a standard textbook on European integration. “The amounts we are talking about are too big for anybody but the E.C.B.”
At issue is whether the bank has the will ― or the legal foundation ― to become a European version of the Federal Reserve in the United States, with a license to print money in whatever quantity it considers necessary to ensure the smooth functioning of markets and, if needed, to essentially bail out countries that are members of the euro zone.
Traditionally, and according to its charter, the European bank has viewed its role in much narrower terms, as a guardian of the value of the euro with a mission to prevent inflation. But as market unease has spread over the past two years, critics say the bank’s obsession with what they say is a phantom threat of inflation has stifled growth and helped bring the euro zone to the edge of a financial precipice.
With events threatening to spin out of control, the burden now rests on Mario Draghi, an inflation fighter in the job barely two weeks who surprised many economists by immediately cutting interest rates a quarter point.
“Everything until now is just a prelude. This is where it gets serious,” said Peter Zeihan, vice president of analysis at Stratfor, a geopolitical research center. “This is not purely economics. This is about Germany’s position in Europe and whether they control the institutions or not.”
Angela Merkel, Germany’s chancellor, and President Nicolas Sarkozy of France held a conference call on Thursday with Italy’s newly sworn-in prime minister, Mario Monti, to discuss how Italy could win back the confidence of markets, Mrs. Merkel’s office said in a statement. German policymakers believe the crisis is serving a purpose, keeping pressure on free-spending governments and forcing them to reform. Any rescue by the European Central Bank, they say, would only delay the inevitable reckoning.
Unlike the Federal Reserve, which has a mandate to promote employment as well as to fight inflation, the European Central Bank is charged first and foremost with maintaining price stability. In addition, the bank is specifically prohibited from financing the governments of euro area members.
So far, the bank’s bond interventions have been modest by central bank standards ― $252 billion so far, compared with more than $2 trillion purchased by the Federal Reserve in recent years. The European bank does not disclose details of its purchases, but it has been active lately, and traders said it bought Spanish and Italian bonds on Thursday in small amounts, Reuters reported.