About EU Rescue Package

I am somewhat busy now, but I should perhaps still briefly comment on the rescue package agreed upon by EU leaders. It is not quite what I would have preferred, as it would have been better to not specify any amounts, but simply impose an open ended mechanism that I described here, where countries with low borrowing costs offer in exchange for a reasonable yield premium (with an interest rate of say 5%) and commitment to fiscal austerity measures. That way there wouldn't be any potential risk of having to return to new "crisis meetings" because someone argued that the sums were insufficient, something which in turn would cause another round of panic.

Still, the €700 billion or so now specified should probably be sufficient. If the panic subsides, then only a small fraction of it (or even nothing at all) will have to be actually exercised (Because if for example Portugal and Spain can borrow at a cheaper rate in the bond markets, there will be no reason for them to tap into any of the pledged €700 billion). But even if it doesn't, this amount should be sufficient for at least the coming year and probably even longer. So it was clearly a big step in the right direction.

In addition to that, the ECB now opens up the possibility of it buying government bonds, something which will improve the odds that the panic will subside.

One question is whether this is inflationary or not. The answer to that depends on whether or not the ECB keeps its pledge to "sterilize" these purchases or not. If it does, then it will not affect the size of the monetary base and thus not be inflationary. If however it doesn't keep this pledge, then this action will indeed increase inflation.