When the monetary politicians of the European Central Bank (ECB) meet on December 16, the focus will of course be on inflation, which is far too high.
But the truth is that there is an even more important item on the agenda: How clearly is monetary policy differentiated from financial policy? How clearly is the ECB sending a signal to European heads of government and finance ministers that they can no longer dispose of their problems in Frankfurt? The central bank should show a clear edge on this point.
It is precisely this signal that is used when deciding on the PEPP emergency program. The ECB will likely decide to let it expire next March. But what’s next?
With a total volume of 1.85 trillion euros, PEPP was and is not only a particularly large program for purchasing bonds. It’s also particularly flexible. Under PEPP, which is due to the corona pandemic, the ECB can specifically assist individual governments with purchases of government bonds, while otherwise it is largely tied to certain weightings. The ECB made only very limited use of this freedom. But the mere fact that it can help prevents the capital markets from speculative attacks on individual euro countries.
Do not open any back doors!
The question now is whether the ECB will give up this flexibility or keep a back door open in order to help individual governments in a targeted manner. It could take advantage of the fact that at PEPP, even after the official stop of net acquisitions, papers that are still expiring are initially being replaced. Or explicitly indicate that PEPP can be renewed at any time. Or flexibly spice up another currently running purchase program with the APP.
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She shouldn’t be doing any of this. Every open back door signals to the heads of government that they do not have to worry too much about debts because they could at any time dump it back to the ECB. And if that leads to inflation in the longer term, they can point a finger at Frankfurt.
To avoid misunderstandings, it is primarily, but by no means exclusively, that governments take responsibility for their own debts. It is also crucial that the financial equalization created due to Corona is continued within a reasonable framework at the European level.
In a uniform market, as within individual countries, there will always be a need for a balance between stronger and weaker regions, between exporting and importing countries. The question is not whether, but how it takes place, because there can only be export surpluses if the bottom line is that credit is bought elsewhere.
Five options for financial equalization
In principle, there are five options for financial equalization. Firstly, the devaluation of the currency of a country with a debt overhang, which is not possible in the euro area. Then direct financial transfers, compensation through monetary policy through the back door à la PEPP, or, as in the euro crisis in Greece, a haircut. And finally, the import of workers instead of goods and services, Germany is already doing this extensively.
The detour via monetary policy is the most convenient route for governments. The ECB should make it clear that it is not available for this. Of course, she will always save the euro before everything collapses – that is clearly part of her mandate to keep prices stable. But if it offers that on its own, it makes itself dependent on politics and damages its credibility.
More: In the US, the sharpest rise in inflation in almost 40 years