For months, experts have been discussing an “instrument” that the European Central Bank (ECB) could use to protect highly indebted countries such as Italy and Spain from a sharp rise in bond yields. The ECB itself has fueled the speculation about this. Before their council meeting last week, it leaked out that there could be resolutions on this. But in her press conference, the head of the central bank, Christine Lagarde, did not provide any new insights.
Even then there were conflicting signals. In a speech in Paris, board member Isabel Schnabel promised “unlimited” action against a “fragmentation” of the monetary union, i.e. a speculation-driven widening of the yield differences between the individual member countries. But again she gave no details. A day later, the Governing Council of the ECB met for a special meeting, but did not take any decisions either, instead deferring the issue to specialist committees.
The back and forth shows how difficult the decision is. In case of doubt, the ECB remains the only authority that can prevent the euro zone from breaking up if tensions become too great and the financial politicians do nothing to counteract this. On the other hand, it is de facto interfering in financial policy itself, which entails political and legal problems. Nevertheless: not offering a concrete solution is not a solution in the long run. She soon has to explain what kind of “instruments” she has ready. The hope would be that a clear stance would save her from actually using it.
There are certainly arguments for special aid for individual countries. They can make it easier for the ECB to raise interest rates across the board to fight inflation without doing too much damage. If yields in countries like Italy or Spain rise much more sharply than in Germany, for example, due to the tightening of monetary policy, it will be more difficult to push through interest rate hikes. Because rising yields on government bonds also drive up the financing costs of companies in the respective country, so it’s about the development of the entire economy.
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A higher interest rate level is probably more manageable for the states than for companies because they have used the phase of low interest rates to finance themselves in the long term on good terms. For many companies in southern Europe, however, a drastic rise in interest rates would mean a dangerous burden.
A new instrument creates new problems
This problem could be solved by a new “instrument”. At the same time, however, this would create new problems. For example, the question arises of how to differentiate between which yield spreads are speculative and which are fundamentally justified. And should central bankers decide on this?
Ultimately, stronger selective interventions by the ECB in the bond market mean that individual countries can take on more debt without bearing the full consequences. As a result, dangerous expectations of the ECB have built up, which continue to grow with every intervention. The statements by the Italian opposition politician Matteo Salvini, who spoke of an “attack” by the central bank on Italy last week because of the lack of concrete aid, are an example of this.
In addition, a new “instrument” harbors legal risks. It could be considered prohibited state financing and thus end up again before the European Court of Justice or the Federal Constitutional Court.
All of this shows that there is no ideal solution. This is due to the construction of monetary union: it is not a fiscal union, which is why politicians can always dump the burden of keeping it together on the ECB. As long as this remains the case, the ECB is in a dilemma and can only try to fulfill its tasks pragmatically and cause as little damage as possible. But she still has to make it clear how she intends to keep the eurozone together in an emergency.
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