To complement the ‘no shared liability’ rule and public deficit limits, the Maastricht Treaty gave the European Central Bank (ECB) a narrow remit to focus on price stability. Crucially, as a ‘non-sovereign’ central bank, it was unclear that the ECB would act as lender of last resort in the event of market panics. The neoliberal orthodoxy at the heart of Economic and Monetary Union (EMU) held that moral hazard and inflationary risks militated against anything resembling ‘illegal monetary financing’. Following monetary union, markets under-priced risks and encouraged bubbles, but, with the onset of the crisis, sentiment overshot the other way, starving credit from banks and later sovereigns. With bailout funds limited and austerity failing to improve debt spreads, sovereigns became illiquid. ECB officials reluctantly concluded that an uncontrolled sovereign default would threaten the continuation of monetary union. The ECB was thus forced de facto to expand its mandate, first to help banks and, later, to help sovereigns facing loss of access to bond markets. Ultimately this was successful in restoring confidence, but the ECB remained uncomfortable with its role. It has continued to stress its legal limitations and has pressed for reformed governance to enforce fiscal discipline. The economic case for a lender of last resort in a crisis was always strong, but brings with it a worsening moral hazard problem that may invite leaders to avoid the deeper political changes necessary to rebalance the Eurozone.
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