The central bank has announced a new bond building program.
(Photo: dpa)
At its meeting on July 21, the European Central Bank (ECB) wants to present the details of the announced “anti-fragmentation” program – and if these are not convincing, the euro crisis threatens to flare up again.
After the ECB announced that it was ending its bond building program and interest rates to increase, the differences in the cost of financing in the bond market widened considerably. The difference in interest rates on long-term government bonds between Germany and Italy has meanwhile risen to 2.5 percentage points.
Monetary policy exerts its effect largely by influencing financing conditions – when these differ so greatly between two countries, the effect of a single monetary policy on the economy is disrupted, at least in some countries.
But isn’t Italy itself to blame for the financing costs, which are now rising compared to Germany, due to poorer financial and economic policy? Based on the experience of the euro crisis, we know that this explanation does not go far enough: Investors tend to exaggerate when buying and selling.
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At the height of the euro crisis, financing costs in Italy and Spain shot up well above the level justified by the financial and economic data. This was due to rampant speculation.
Before Mario Draghi uttered his now famous words “The ECB is ready to do whatever it takes” in the summer of 2012, it was doubtful whether the ECB would support the bond markets. Things calmed down after Draghi’s intervention, which was supported by German Chancellor Angela Merkel.
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (WIIW).
In the case of Italy in particular, the accusation that an “anti-fragmentation” program by the ECB is just another invitation to engage in excessive government spending is outrageous. Until the Covid-19 crisis, which occurred through no fault of their own, Italy was the world champion in terms of budget surpluses, excluding interest payments. The state austerity measures far exceeded those in Germany.
In any case, the ECB would ideally not have to buy bonds on a large scale with a new program; the announcement alone could already contribute to stabilization. Because it could contain the self-fulfilling speculation on falling bond prices and rising interest rates.
Panic-like exaggerations on the bond markets cannot be prevented by committing to budget consolidation measures and “structural reforms” in individual countries.
>> Read here: Equities, bonds and real estate: what does the turnaround in interest rates mean for investors?
The rapid increase in Italian interest rate spreads over Germany was not due to a lack of fiscal policy discipline in Italy, but to the incomplete euro zone architecture, which causes a homegrown vulnerability: the central bank cannot always credibly step into speculation prevention for institutional and political reasons .
Many people may not like the fact that the ECB has to repeatedly adjust its mandate in order to prevent worse things from happening. However, it results from the need for a pragmatic monetary policy geared towards the cohesion of the monetary union: price stability cannot be achieved if the financial markets remain under stress.
If the euro zone is to emerge from crisis mode, then in Germany too, without ideological blinkers, we will finally have to discuss the mandate of the ECB and greater European integration of fiscal policy.
More: ECB decision: Can the southern countries cope with higher interest rates at all?