Targeted bond purchases by the European Central Bank have long been criticized.
(Photo: dpa)
Frankfurt The German Institute for Economic Research (DIW) criticizes the new instrument of the European Central Bank (ECB), known under the abbreviation TPI. TPI stands for “Transmission Protection Instrument”. With targeted purchases of government bonds from individual euro countries, the ECB wants to ensure, under certain conditions, that its monetary policy is equally effective in all regions of the euro area.
Targeted bond purchases by the ECB have long drawn criticism because they bring monetary policy close to state financing. The issue was even negotiated before the European Court of Justice and the Federal Constitutional Court. The DIW, whose boss Marcel Fratzscher has often defended the line of the ECB, is moving somewhat closer to the camp of the critics with the new study.
The analysis, written by Kerstin Bernoth and three other colleagues at the DIW, states: “The activation of TPI requires sound and sustainable budgetary and economic policies, as can be seen from the admission criteria. However, the institutional structure of the ECB is not suitable for an assessment of these criteria.” The “discretionary scope” in the assessment of individual states could “expose the ECB to political pressure and endanger its independence”.
ECB President Christine Lagarde, on the other hand, recently argued that the central bank would also use the expertise of other institutions such as the International Monetary Fund (IMF) when assessing individual countries. But ultimately she has to make her own judgment in order to maintain her independence.
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The study itself also examines whether the use of TPIs would currently be justified in the euro area and, after detailed calculations, comes to a clear conclusion: no. In practice, the ECB is concerned with limiting the so-called risk premiums (spreads) of highly indebted euro countries, for example the difference in bond yields between Italian and German government bonds. Excessive spreads can cause distortions on the capital markets and ultimately endanger the stability of the currency union.
There have already been two programs
Because the ECB recently raised its interest rates significantly to combat inflation, concerns about indebted countries and thus spreads grew. The DIW concedes: “In the highly indebted countries, the monetary policy course is more restrictive and thus growth and price dampening than in the member countries with lower debt ratios. So the transmission of monetary policy is not uniform.” Nevertheless, the study concludes that the spreads are “justified” from a fundamental point of view, but that the use of TPI would not be justified.
The ECB has two other programs under which it specifically buys bonds from individual countries. One, known by the acronym OMT, was created around ten years ago during the euro crisis. It only allows these purchases if a country first submits to the European bailout fund (ESM). But any government would see that as a disgrace.
Because of this, OMT has never been activated, but at times it has been very effective in preventing speculative attacks on individual countries’ bonds because it has always acted as a background threat to quickly turn the market around if necessary.
>> Read here: TPI crisis tool: This is how the ECB wants to support fragile euro states
For the time being, another instrument is provided by the Pandemic Emergency Program (PEPP), under which bonds were bought on a large scale. Although no more securities are purchased net under PEPP, the ECB can use the replacement of expiring securities. It has recently given preference to Italian over German government bonds and has already slowed down the rise in spreads.
However, critics such as Robin Brooks, the chief economist at the major banking organization IFF in Washington, have long feared that the ECB’s purchases would ultimately support Italian securities in such a way that they would become uninteresting for private investors – which could mean that the ECB would find it difficult to get out comes out of their role as emergency workers.
More: Why politicizing the ECB is dangerous