Lending Money and ECB

European Union: The ECB is prohibited by EU treaty from lending money directly to governments, according to Deutsche Welle. German negotiators insisted on this prohibition when the euro was created, in order to prevent governments from being tempted to finance deficit spending by having the central bank print money - a practice that, taken to excess, can result in high inflation. The ECJ decision has major implications for the future of the euro - the common currency used by 19 European Union member nations - and for the ability of several governments to fund themselves. "OMT made it possible for the ECB to lend money - albeit indirectly - to individual eurozone member governments like Portugal, Spain and Greece that, in 2011-2012, were having trouble raising money on bond markets at affordable interest rates," said Philipp König, a macro-economist at the German Institute for Economic Research in Berlin. With OMT, the ECB proposed getting around the prohibition by the simple expedient of buying government bonds from secondary bond markets, rather than directly from governments. Some very influential German economists - including Jens Weidmann, now head of the Bundesbank, - strongly opposed OMT because they saw it as an attempt to weaken a rule they considered fundamental to guaranteeing a stable euro. In effect, the ECB would tell institutional investors like pension funds that if they bought fresh bonds from troubled governments, the ECB would in turn buy those bonds from the investors. (news.financializer.com). As reported in the news.