France urges Europe to make ECB lender of last resort

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France stepped up pressure on its eurozone partners on Wednesday to allow the European Central Bank to become a lender of last resort, monetising debt, despite strong German opposition.

President Nicolas Sarkozy's government believes intervention by the central bank -- effectively authorising it to issue new money to head off the threat of debt default by member states -- could end the eurozone crisis.

But Germany fears a recourse to debt monetisation could fuel inflation and undermine the single currency, and the idea is in any case ruled out under current European Union treaties.

"The best way to avoid contagion in countries like Spain and Italy is, as far as France is concerned, an intervention or a possible intervention, an announcement that a lender of last resort could intervene, in the form of the European Central Bank," Finance Minister Francois Baroin said.

Addressing a conference on the global financial system in Paris, Baroin admitted Germany was opposed to such a move, attributing it to its memory of pre-World War II hyper-inflation that wiped out German savings.

And he added: "European treaties ... do not allow us to work with states in a kind of monetisation of their budget policies."

At an EU summit in Brussels last month France pushed strongly for the ECB to be allowed to intervene to head off market worries over eurozone member states' debts by standing by to act as a lender.

And Baroin insisted that the experience of other central banks outside the eurozone proved that, done right, intervention does not directly lead states into hyperinflation or exaggerated debt.

© 2011 AFP

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