Article 123 [Prohibition of Credit Facilities]

The economic rationale behind the prohibition of monetary financing is the well-accepted idea that the public sector shall be financed in the same conditions applied to private investors and submitted to market discipline. History is littered with examples of governments using the central bank to finance public expenditure when they were unable or unwilling to raise the money on capital markets. The result was often spiralling inflation, and the literature has shown that high inflation, which can arise from such subordination of monetary policy to fiscal needs, is in turn detrimental for growth. The application of market discipline to the financing of States and the prohibition of central bank financing of public entities prevent abuses of the central banks’ ability to print money. Its purpose is to protect the central bank’s independence and its ability to maintain price stability, which could be undermined if governments had direct access to central bank money. It helps to protect central banks from political pressures.