Many economists who are watching the European situation say any short-run solution to the European debt crisis must come from the European Central Bank at the center of the euro and the euro countries. So what does the ECB have to do? N.C. State University economist Mike Walden responds:
Well … many are calling for the ECB … to do something that they’ve been very reluctant to do since their inception and that is simply to print euros, to print money and use that printed money to either buy the bad debt that many countries have or make loans against that bad debt.
Now this would be only a short-term solution, but it would be a backstop and it would provide some temporary stability to the European situation and allow them time to get their broader fiscal issues under … control. Clearly a downside is when you print money, whether it’s dollars or euros, you’re going to … deteriorate the value of that currency, set up the possibility for higher inflation Europe — and that’s something the ECB has been very, very reluctant to do over its years.
In fact, in its charter, it says that the ECB’s main function is to keep inflation moderate, not to grow the economy, unlike our Fed. So this would be a major shift for them, but many say this is the ultimate short-term solution. So, that’s why I think we should keep our eyes on what the policies are that the ECB will plan to follow in the coming months.