Treasury Secretary Timothy F. Geithner is pushing to make the European Central Bank the ultimate guarantor of bonds issued by the 17 countries that share the euro, a fundamental shift he maintains is the only sure way to solve a crisis threatening the global recovery.
In meetings in recent weeks in France, Poland and now Washington, Geithner has made the case that without strong backing from their central bank, governments in the euro area will be hampered for years by suspicion that their bonds are risky bets for investors. That lack of confidence has rocked global markets in recent weeks and could continue to threaten the European economy and banking system.
Sept. 23 (Bloomberg) -- European Union Monetary Affairs Commissioner Olli Rehn talks about how two dozen of Europe's banks need to present plans to recapitalize following stress tests earlier this year. He speaks with Sara Eisen on Bloomberg Television's "Street Smart." (Source: Bloomberg)
The proposal to expand the ECB’s role has divided European officials and bankers. Supporters agree that euro-zone governments need stronger support from the central bank, while skeptics worry such an arrangement would encourage undisciplined countries to spend.
The idea Geithner is advocating would make the ECB more like the U.S. Federal Reserve and other central banks, which provide a last-resort guarantee that a government will not run out of money.
The role can be controversial — as have been the steps taken by the Fed in response to the U.S. financial crisis and recession — and can fuel inflation when excessive.
In Europe, the individual countries of the euro monetary union cannot rely on the ECB the same way. Investors have increasingly recognized that nations such as Greece, Portugal and Italy do not have the same sort of backstop that the United States has with the Fed and have driven up the borrowing costs for those countries.
The ECB was set up with a narrower mission — to control inflation — and its governing board has been hesitant to expand that role. While the bank has been buying government bonds in recent weeks to lower the interest rates paid by Italy and Spain, even that limited step has caused dissension on the ECB board. The bank’s leaders have said they hope to stop the practice as soon as possible.
Geithner’s argument is relatively new, but it is an extension of one he made unsuccessfully early last year to European finance ministers when he urged them to act quickly and with massive financial resources to extinguish the debt crisis then emerging in Greece.
With Europe’s crisis now threatening global financial stability and European countries receiving emergency bailouts, the politics of the discussion have shifted. Top leaders in Europe now acknowledge they need to make dramatic changes in how the euro zone operates.
Olli Rehn, European economic and monetary affairs commissioner, said Geithner’s role in recent discussions had been “very constructive” and that euro-zone leaders were intensely studying the role of the Fed in responding to the U.S. financial crisis.
Other major nations have picked up the call. The prospect of continued crisis and the potential for Europe’s ills to trigger a new recession prompted the Group of 20 major economic nations on Thursday to express impatience with the euro-zone countries’ inability to solve their problems.