Here's an interesting article in the FT explaining how Germany is already paying for the euro crisis:
http://ftalphaville.ft.com/blog/2011/12/06/782821/how-germany-is-paying-for-the-eurozone-crisis-anyway/It's based around the following article on the Vox site (already identified by Napodano as a useful resource):
http://www.voxeu.org/index.php?q=node/7391It addresses issues already raised by Martin Wolf in the FT and also gives an insight into how the ECB works through the decentralised national central banks and the Target2 system. Getting my head around the arguments really makes my old brain hurt, but I think it's important. As I understand it, the argument is that the Bundesbank may be running out of quality assets to sell in order to make loans to the other central banks, leaving the euro vulnerable to speculative attack
á la Black Wednesday. The options of selling gold or foreign exchange reserves seem unlikely to be acceptable to the German public. This is the conclusion from the Vox post:
'Up to now, Bundesbank loans have allowed GIIPS central banks to buy government bonds without a corresponding increase in the monetary base of the Eurozone as a whole – ie, without the ECB printing more money (after an expansion in 2008, the monetary base returned to trend growth). Before long, however, the Bundesbank’s stock of domestic assets is going to hit zero, and it is highly unlikely that it will agree to sell its gold or borrow more in private capital markets. At that point, the Bundesbank will not be able to lend more funds to the Eurozone TARGET mechanism. As a result we are heading towards the multiple equilibria zone in which beliefs of a breakdown of the Eurozone are self-fulfilling. In such a situation, market participants may transfer funds from financial institutions in fiscally weak countries to other ‘safe’ countries like Germany. In tranquil times, such transfers can be done seamlessly through the TARGET mechanism of the ECB. However, if a critical mass of agents were to engage in such capital flight away from fiscally weak countries, the TARGET system would be overwhelmed. In principle, a speculative attack could occur within a day, and the ECB would have to assume all of the marketable securities from countries that suffer the speculative attack. Since the ECB has a relatively small capital base, it would not be able to purchase a large amount of assets from countries that suffer the attack.
In Act Two of the unfolding Eurozone drama, the new measures might include the ECB printing more money, the EU announcing the issuance of Eurobonds, or the IMF extending credit lines to strapped governments. The motive of such a policy response is to prevent a speculative attack and induce a shift to the good equilibrium. These actions will buy some time for economic and fiscal reforms to take place. However, as previous experiences suggest, if reforms do not take place, these measures may be very costly to the taxpayer (see Sachs et al 1996).'
Any practising macroeconomists/monetary economists out there who can confirm or pick holes in the above arguments?
