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11 November 2011

IPE: Krugman says ECB must become lender of last resort


Nobel laureate, Paul Krugman, argues that the European Central Bank (ECB) must become a lender of last resort and adopt a more tolerant attitude to inflation if it hopes to improve the economic situation within the eurozone.

The Princeton University lecturer also debated the fate of the eurozone with Otmar Issing, former member of the ECB executive board. Issing was critical of several points raised by Krugman, who likened the role that the ECB should assume to that of the US Federal Reserve (Fed) or the Bank of England (BoE). "The comparison is, for me, somewhat misleading", the German economist said. "The Fed is not buying the bonds of Florida or California, the Fed is buying bonds for the US Treasury.“

Krugman insisted that countries were in crisis independent of their debt level, saying that comparing the UK and Spain should leave the former in a worse situation than the eurozone member. "What we need to understand here is that, while this is a sovereign debt crisis, it's an oddly asymmetric one", he said. "You cannot predict who's in trouble by looking at debt levels of even debt projections."

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