With the TPI, the ECB has created the opportunity to specifically buy government bonds from countries that are confronted with excessive increases in capital market interest rates.
(Photo: dpa)
With the “Transmission Protection Instrument” (TPI), the European Central Bank (ECB) has created a new instrument that is intended to prevent an unequal transfer of monetary policy measures to the individual member states, referred to as fragmentation in ECB jargon.
If the ECB raises short-term interest rates, as is the case now, this stimulus should have the same effect in all countries. Longer-term interest rates, which are determined by the bond markets, are decisive for the effects on aggregate demand.
If an increase in the key ECB interest rates leads to particularly sharp increases in long-term interest rates in some member states, the economic braking effect for these countries will be greater than intended by the ECB.
With the TPI, the ECB has created the opportunity to specifically buy government bonds from countries that are confronted with excessive increases in capital market interest rates.
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However, the objection raised against controlling the interest rate differentials between countries is that this would impair the disciplining function of the capital markets. This ensures that countries pursue a stability-oriented policy because otherwise they would have to fear being punished by higher interest rates.
But even the 1989 Delors Report, the basis for the Maastricht Treaty, warned that market discipline was either too slow and weak or too sudden and destructive.
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This is precisely what was observed when Greece had a near-zero interest rate spread over Bunds in the 2000s, despite obvious fiscal excesses. When it shot up abruptly in early 2010, the child had already fallen into the well.
Anyone who advocates market discipline should remember that during the financial crisis it was the states that had to rescue financial markets that had galloped terribly. Wouldn’t we rather have financial markets under state control than the other way around?
TPI creates an additional incentive for compliance
The alternative to market discipline is political discipline. It is anchored in EU regulations such as the Stability and Growth Pact, the macroeconomic imbalance procedure and the “European Semester” with country-specific recommendations. It’s not perfect, but a comparison with the United States shows that the euro area has significantly lower budget deficits.
Peter Bofinger is a professor of economics at the University of Würzburg and was a member of the Advisory Council.
It is therefore logical that the ECB makes the use of its new instrument in favor of a country conditional on it adhering to regulations that lie outside the sphere of influence of monetary policy.
At the same time, the TPI creates an additional incentive for the member states to comply with the rules. The lower level of market discipline is thus offset by a higher level of political discipline.
More: New crisis tool TPI – This is how the ECB wants to support fragile euro states.