David Prosser: Sir Mervyn spells it out: the European Central Bank cannot ride to the rescue

Outlook: Anyone who needs a back-to-basics primer on why the European Central Bankcannot simply wade into the eurozone crisis to save the day by buying up all the debt that Italy, Spain and the rest need to issue could do worse than reading the remarks made by Sir Mervyn King yesterday.

Being a "lender of last resort", said the Bank of England's Governor, "is a million miles away from the ECBbuying sovereign debt of national countries, which is used and seen as a mechanism for financing the current account deficit of those countries, whichinevitably, if things go wrong, will create liabilities for the surplus countries".

Sir Mervyn's point, in case that's not clear enough, is that the ECB's backers, the member states of the eurozone, will incur losses if their central bank makes loans on which borrowers subsequently default. The ECB should not be lending to the eurozone's cash-strapped countries because to do so wouldexpose all member states, including those not in financial difficulty, topotential losses.

One can quite understand why governments in countries such as Germany might be prepared to accept the risk. For Angela Merkel, lending via the ECB is a much less visible commitment than asking German taxpayers to subsidise the periphery directly, even if theexposure is really no different. But it really should not be the job of the European Central Bank – or any other central bank for that matter, which may be why Sir Mervyn was so keen to offer support yesterday – to step in where national governments are afraid to tread for political reasons.

What does that mean for the current impasse in the eurozone? Broadly, it means over to you Ms Merkel. Italy's new Prime Minister Mario Monti and his technocratic cabinet will no doubt do their best to convince the markets that the eurozone's third biggest economy can get on top of its debt pile. In Spain, we will know more about the outlook following the general election this coming weekend.

In both cases, however, bondmarket investors will not lend money at affordable rates unless a credible back-up plan is put in place – a facility to repay them in the event that Italy and Spain prove unable to do so. The ECB, for the reasons Sir Mervyn, pictured, outlined yesterday, cannot be that facility, which leaves only the European Financial Stability Fund. And while it may be able to attract foreign support, one can hardly expect the Chinese, say, to put their hands in their pockets, unless the strongest members of the eurozone have already done so.

And so the brinkmanship continues. Both Spain and Italy have very significant funding requirements in 2012. Ms Merkel, meanwhile, faces a general election in 2013. Is she prepared to put more German money on the line in the knowledge that doing so will damage her chances of re-election a few months later? If not, Ms Merkel may yet be paying for her campaign materials in deutschmarks rather than euros.

PROMOTED VIDEO
Arts and Entertainment
musicBand's first new record for 20 years has some tough acts to follow
News
peopleAt least it's for a worthwhile cause
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
News
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Life and Style
healthFor Pure-O OCD sufferers this is a reality they live in
Life and Style
Sexual health charities have campaigned for the kits to be regulated
healthAmerican woman who did tells parents there is 'nothing to be afraid of'
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments