The European Central Bank reinvested billions in government bonds from southern European countries.
(Photo: dpa)
The European Central Bank’s (ECB) Pandemic Emergency Purchase Program (PEPP) has played a crucial role in preventing bond and stock markets from crashing. In March 2020, these were under enormous stress due to exaggerated market reactions to the effects of the corona pandemic, which quickly subsided thanks to the PEPP.
The ECB ended its PEPP net purchases of existing government bonds in March 2022. But now she holds 1690 billion euros in government bondsthat have been purchased since 2020. The maturities of these bonds vary between a few months and three decades.
When a bond matures, the government pays it back to the ECB. In order not to shrink the amount of money it puts into circulation and thus deprive the financial markets of liquidity, which would be risky in an uncertain economic environment, the ECB reinvests the funds.
A PEPP feature is that the ECB can flexibly decide which bonds to buy. So if a German bond is now repaid, the ECB can reinvest the funds in the purchase of existing bonds from other countries.
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Indeed, in June and July 2022, the ECB did just that: you reinvested 17 billion euros in Italian, Spanish and Greek government bondswhile their portfolio of German, Dutch and French debt shrank accordingly.
Germany has an undeserved advantage
The PEPP reinvestments are the first line of defense against a new euro crisis on the horizon, which could arise from a divergence in interest rates between German bonds and those of southern European countries. In particular, the ECB’s actions in the past few weeks have contained the interest rate differential between Germany and Italy.
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (WIIW).
The ECB is not simply turning the countries of southern Europe with higher debt into winners, as Daniel Stelter, among others, claims. Rather, the ECB is helping to balance structural advantages and disadvantages in the euro area. What is often overlooked in the discourse is that Germany, as the economically and politically most powerful country in the euro zone, has an undeserved advantage: Especially in times of crisis, investors want to buy federal bonds, which are considered the safest haven; Germany thus benefits from the lowest bond interest rates.
Southern Europe, on the other hand, is exposed to structural disadvantages because of the construction of the euro. The euro combines supranational monetary policy with national fiscal policy.
The ECB must be credible behind bonds issued by individual governments that investors have singled out as wobbly candidates. Otherwise, these states cannot defend themselves against speculative market exaggerations, which, in the event of uncertainty, cause their bond interest rates and thus also the general interest rate level in the country to rise much more sharply than in Germany, which is structurally advantaged.
In order to eliminate legal doubts and to stabilize the monetary union in the long term, the monetary policy handling of government debt should be discussed democratically and regulated more clearly in the ECB mandate than has been the case up to now.
More: The central bank must not leave bond interest rates to the market alone