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Carlo Panico and Francesco Purificato

POLITICAL ECONOMY
RESEARCH INSTITUTE

The Debt Crisis and the
European Central Bank’s Role of
Lender of Last Resort

Gordon Hall
418 North Pleasant Street
Amherst, MA 01002

January 2013

Phone: 413.545.6355
Fax: 413.577.0261 peri@econs.umass.edu www.peri.umass.edu

WORKINGPAPER SERIES
Number 306

The debt crisis and the European Central Bank’s role of lender of last resort by Carlo Panico and Francesco Purificato

1. The debate on the role of the central bank in the European debt crisis reveals the increasing difficulty of the authorities to apply sensible solutions. De Grauwe and Ji express this opinion by noticing that unfounded fears ‘have been widely advertised in
Germany and have contributed to creating a view in that country that the German taxpayer is likely to become the victim of a money machine that rewards the profligacy of Southern European countries’ (De Grauwe and Ji, 2012, p. 1). These fears ‘have become powerful political forces that make it difficult for the governments to find rational solutions to the euro crisis’ (De Grauwe and Ji, 2012, p. 13).
In order to appraise this opinion we discuss how the European Central Bank (ECB) and the Eurosystem have been intervening in favour of the Government sector. We start by noticing that central banks can play the role of lenders of last resort in favour of the banking and of the Government sector and that “moral hazard” problems emerge in both cases. Yet, they have only been mentioned to curtail the interventions in favour of the
Government sector, in spite of the fact that, during the last two decades, moral hazard regarding the behaviour of the Government sector has proved easier to solve than that regarding the behaviour of the managers of financial firms. The rules on multilateral surveillance, introduced to coordinate the monetary and fiscal policies in Europe,

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