Can central banks save us? No, not completely. But they hold part of the key to solving the current crisis. Let’s start from the beginning. There have always been two ways for governments to get money: impose taxes or create currency. Generally speaking, it’s infinitely preferable to impose taxes. The price for printing money is inflation, which creates distributive consequences that are hard to control (those with slower income growth pay dearly) and unsettles trade and production. Moreover, once it’s underway, the inflationary process is hard to stop and brings no further benefit.

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[...] Clearly, after several decades of denigrating the state, it feels more natural to us to print money to save banks than to save governments. Yet the inflationary risk is just as low in both cases, and it can be managed. The ECB could take onto its own balance sheet a good part of the 20 percent of GDP worth of public debt created by the recession, at low interest rates, while announcing that it will raise interest rates if inflation exceeds 5 percent. That won’t excuse European governments from the need to get their finances under control and, above all, finally unite to issue a common European debt, to benefit from low interest rates together. But if they go all in on drastic austerity policies, there is a high risk that it will lead to disaster. Financial crises are part and parcel of capitalism. And when faced with major crises, central banks are irreplaceable. Of course, their infinite power to create money must be kept within bounds. But not to fully use this tool in today’s context would be a suicidal and irrational strategy.