Why has the ECB refused to take up its responsibility of lender of last resort in the government bond markets (while it has dutifully taken up this responsibility during the banking crisis)? A popular answer is that the ECB should not do this because it risks losing money. This is certainly the wrong answer. When there is confidence that the central bank will operate as a lender of last resort in the sovereign bond markets, the central bank does not have to act as a lender of last resort most of the time. And when it has to do so, we should not really worry about the fact that it loses money. What matters is financial stability, not the profit and loss account of the central bank. A central bank can always fill the holes by printing money.

A more serious concern is moral hazard, i.e. the risk that if the ECB guarantees that cash will always be available to pay out sovereign bond holders, this will lead governments to issue too much debt. But this risk of moral hazard is no different from the risk of moral hazard in the banking system. The way to deal with this risk is not to abolish the role of lender of last resort but to create rules that will constrain governments in issuing debt.

The ECB has been influenced too much by the one-dimensional theory of inflation targeting. According to that theory, all a central bank should do is to stabilize the price level. All the rest will then also be stable. Historically, however, central banks have been invested with another equally important task, i.e. to ensure financial stability, which includes stabilizing the government bond market.  By refusing this role in the Eurozone, the ECB has become the single most important reason why the Eurozone crisis cannot be stopped.