The Sovereign Debt Crisis in Europe, Save Banks Not States

Hans-Bernd Schäfer
2011 Social Science Research Network  
The European central bank is a bank of banks but not a bank of states. This reduces the capabilities of member states to finance deficits. The role of the central bank to cope with the debt crises is institutionally more limited than in most other Western countries. The European Stability Mechanism has not enough financial power to bail out all distressed countries in the Eurozone. Eurobonds could increase lending capacities but would require a change of the European treaty, which is not in
more » ... which is not in sight. They violate the no bail out clause of Art.125 of the Treaty on the Functioning of the European Union. The policy option is therefore debt restructuring of distressed countries and a bailout of financial institutions to avoid conflagration. This option would also shift some of the burden to creditors outside the Eurozone rather than to shift all risk on the people in solvent countries within the Eurozone. JEL classification: G01, K33
doi:10.2139/ssrn.2062802 fatcat:al3ip6srpfc4lhiclbwciysfh4