2. Financial crisis. Why can Spain not borrow but the UK and US can? Palley in today's FT argues that the ECB is indeed a lender of last resort for firms, but does not lend to governments:
"The euro already has a lender of last resort in the European Central Bank, which has dutifully performed that function. Lenders of last resort provide liquidity in financial panics, which is exactly what the ECB did in the financial crisis of 2008-09 and has continued doing via its Lombard lending facility. According to Bagehot’s rule, lenders of last resort should lend without limit, to solvent firms, against good collateral – though Bagehot also recommended lending at high rates, whereas today’s practice is (sensibly) to lend at low rates.
The euro lacks a government banker, like the Federal Reserve or Bank of England, which helps finance budget deficits and keeps rates low on government debt. This explains why the US and UK can borrow at low rates and remain solvent, whereas Spain, which has a roughly similar deficit and debt profile, is under speculative attack.
the euro instituted “central bank dominance” by stripping governments of access to central bank help in managing public finances. This was done by creating a “detached” central bank that is prohibited from buying government debt. This is fundamentally different from an “independent” central bank which distances its decision-making from government, but is allowed to purchase government debt. The Federal Reserve and the Bank of England are both independent but not detached. The ECB is detached by design.
...The solution is to create a European Public Finance Authority (EPFA) that issues collectively guaranteed debt on behalf of eurozone governments which the ECB is allowed to buy...
Characterising the euro’s problem as a lack of a lender of last resort obscures its fundamental neoliberal design flaw regarding its lack of a government banker and subservience of fiscal policy. That is a structural problem which creates financial fragility and permanent budgetary pressure that shrinks the social democratic policy space."
3. More financial crisis. Who is funding the balance of payments imbalances within the EZ?
I have had trouble following the intricacies of this. It falls under the heading of what has the ECB done in the crisis, that Martin Wolf deals with here? The conventional answer is cut interest rates etc. The additional answer is funding imbalances. I think it works like this.
Before the crisis, e.g. Greeks were buying Mercedes cars, but not exporting goods to Germany in return. Thus Germans had to be buying Greek assets ending up as deposits in Greek banks. After the crisis, private lending to Greece has stopped, so finance is needed to cover the deficit, and indeed Greeks are taking money out of Greek banks.
One mechanism is deflation in Greece so that exports rise. That won't happen. Another is via the printing press
National central banks provide their banks with the funds needed to offset the money their residents send abroad, as they pay more for imports than they earn from exports and, instead of being financed voluntarily from abroad, as before, now start to send a large part of their money out of the domestic financial system. This money then ends up in the commercial banks of the surplus countries, which deposit it at their own central banks. In essence, base money is being created in deficit countries and used to pay for goods and services from – and flight capital to – surplus countries.
These net flows of money then end up as liabilities of the central banks of the surplus countries to their own banks. The offsetting shift in the books consists of rising claims of the central banks of the surplus countries (above all, of the Bundesbank) on the central banks of the deficit countries.
Thus the surplus countries now hold, apparantly, vast reserves of periphial countries, the incentive effects of which are to encourage inflation, and if the perphical countries are poor risks, risk for the central bank.
