If the Bundesbank president had his way, the ECB would have to focus more on combating high inflation.
(Photo: Reuters)
Frankfurt On Monday, Bundesbank President Joachim Nagel expressed his skepticism about the attempts by the European Central Bank (ECB) to keep the risk premiums on the bonds of countries with higher debts in check through targeted purchases.
The background to this is that these “spreads”, ie the respective distance to the yield on the federal bond that is considered safe, have widened noticeably with the announcement of the ECB’s change in monetary policy. This even led to fears that the financing burden for countries such as Italy, Greece and Spain could increase to such an extent that there would be a new euro crisis.
“It is entirely plausible that the risk premiums on bonds of highly indebted member states have risen with the announced interest rate turnaround,” argued Nagel, and added: “When the risk-free interest rate rises, market participants check their risk appetite.” He was following an argument that, for example is often expressed by Jörg Krämer, the chief economist at Commerzbank, or Robin Brooks, the chief economist at the banking organization IIF. The economist Volker Wieland is also skeptical.
Nagel therefore warned “to be cautious about trying to limit risk premiums with monetary policy instruments”. He warned, “It is next to impossible to determine with certainty in real-time whether a spread widening is fundamentally warranted. Here you quickly find yourself in dangerous waters.”
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With this, Nagel, who at least publicly expressed reservations on this issue, took a head-on approach to the arguments of the ECB. As the German ECB director Isabel Schnabel explained in a speech, the central bank only wants to combat speculative widening of spreads, but not fundamentally justified premiums. How exactly one differs from the other is completely unclear.
Italy’s central bank chief Ignazio Visco, like Nagel a member of the Governing Council, had already made proposals for his own country, but he was unable to explain them in detail. Nagel therefore demands: “Unusual monetary policy measures against fragmentation can only be justified in exceptional situations and under narrow conditions. From my point of view, it can only be about a clearly defined instrument.”
The ECB is currently mainly discussing conditions
The ECB has been discussing for a few months which concept or “instrument” they want to use to narrow the spreads. It still has a relatively large amount of leeway because, although it is no longer buying any bonds net, it is replacing expiring securities for the time being. She has a great deal of freedom, especially with the bonds she acquired as part of the PEPP pandemic emergency program and can even sell German bonds and buy Italian bonds, for example, in order to narrow the spread.
In addition, another “instrument” is under discussion. In addition to the specific design, the main focus at the moment is on the associated financial policy requirements for beneficiary countries. In this context, Nagel demands: “It is crucial that the member states continue to have sufficient incentives to orient their financial and economic policies towards sustainability and to reduce debt levels. Effective fiscal conditionality is essential here.” However, he did not go into detail about what such conditions might look like. Conditions similar to those for the reconstruction fund are under discussion.
More: “Effective, but also proportionate” – This is the status of the discussion about the new instrument of the ECB