German wise man sees real disaster if ECB doesn't act

DUBLIN (Reuters) - Europe risks real disaster if the European Central Bank (ECB) does not ignore the fears of Germany and act as the currency bloc's lender of last resort, German "wise man" Peter Bofinger said on Sunday.

Chancellor Angela Merkel is resisting calls for the ECB to take on a bigger crisis-fighting role despite a stampede out of European government bonds and a failed bond auction last week in Germany, viewed as Europe's safest haven.

Bofinger, one of the five "wise men" who formally advise the German government on the economy, wants Europe to start issuing joint euro zone bonds and the ECB to buy large amounts of sovereign bonds without sterilizing the purchases -- effectively the same type of quantitative easing undertaken by the U.S. and UK central banks.

"I think if the ECB were not to act, if there is no eurobond, we will run into a real disaster," Bofinger said in an interview with Irish broadcaster RTE.

"We would experience the breakdown of financial markets. We would see a very, very strong recession all over Europe. We would have a long period with very high unemployment all over Europe. Banks would go bankrupt with people losing their money.

"It would be a real disaster if this strategy, which is in fact no strategy, this muddling through, were to continue for some months.

"If this bond run (that Europe is experiencing) is not stopped, it will really endanger the stability of the European and even the global financial system. Bold action by the ECB is definitely needed.

"It (the ECB) does not need the approval of any government."

Germany is opposed to the ECB stepping in to aggressively stanch the crisis because of its own history of fiscal abuse of the central bank that fueled hyperinflation in the 1920s and funded the Nazis' massive rearmament in the run up to World War Two.

But Bofinger said there was a risk of deflation from the ECB's lack of action and said Germans were irrationally fearful of it stepping in.

"This is not a rational debate. The Germans are simply scared," he said.

Ireland's government has blamed the sovereign debt crisis in Europe for the collapse of the sale of the country's largest life insurer Irish Life this week.

Dublin will now have to pour 1.3 billion euros ($1.7 billion) into the insurer's parent group Irish Life & Permanent to fill a capital hole.

Finance Minister Michael Noonan said events last week, including the downgrade of Belgium and the German bond auction, had spooked Canadian insurer Great-West Lifeco, the preferred bidder for Irish Life.

"All these signals are being watched very closely internationally now and internationally everybody in the money business is waiting for a European solution that is convincing and that hasn't been forthcoming yet," Noonan told RTE.

($1 = 0.7536 euros)

(Reporting by Carmel Crimmins; Editing by David Holmes)