Frankfurt The European Central Bank (ECB) is currently observing very closely the yields on government bonds in the euro area, some of which have risen significantly. In any case, she wants to avoid renewed fears of a crisis in the common currency.
In essence, it is about possible growing differences in the yields on government bonds in different countries. If these diverge too far, some states could refinance relatively cheaply and others only at high cost. The concern: Excessively large yield differences could lead individual countries to leave the euro area.
The ECB has already signaled in the past few days that it intends to use all means, including new ones, to counter such a scenario. There are a number of questions about the ECB’s plans.
The euro zone is a monetary union, but not a fiscal union. Time and again, this means that monetary policy indirectly has to take on tasks that should actually be the responsibility of financial policy, i.e. governments. In particular, the budget of the European Union (EU) is not large enough to deal with tensions between individual countries, given that the EU extends beyond the euro zone.
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Was there a “birth defect” in the formation of the euro zone?
The lack of fiscal union is sometimes referred to as a birth defect. On the other hand, however, it is true that a common financial policy can hardly be implemented sensibly without a political union, and to this day nobody wants that. That is why without this “mistake” it is highly unlikely that the euro would have been born at all.
Is the cohesion of the euro zone even a task for the ECB?
Because the danger for the euro zone usually emanates from an unsound financial policy of individual states, sometimes also from a lack of solidarity between the euro countries, cohesion is initially the task of the financial politicians. But if they fail, the ECB has little choice but to step in.
Is the ECB exceeding its mandate in keeping the euro zone together?
Critics often make this accusation. On the other hand, you can hardly ask a central bank to stand by and watch the currency for which it is responsible collapse. The ECB itself justifies targeted interventions by saying that its monetary policy would be disrupted if the turmoil on the bond markets were too great.
Another argument: Should the euro zone collapse, that would also shake up the price structure, and its primary mandate is price stability. In addition, your secondary mandate is to support the economic policy of the European Union. So as long as the EU does not decide to dissolve the monetary union, the second mandate speaks in favor of ensuring cohesion.
But isn’t the ECB engaged in illegal state financing when it specifically supports individual governments by buying government bonds?
In short: From a legal point of view, it does not engage in state financing, but from an economic point of view it does. But the ban initially only plays a role in the legal sphere. From a legal point of view, according to the European Court of Justice, it is not state financing as long as the ECB buys the bonds on the market and not directly from the respective government.
The Federal Constitutional Court objected to the corresponding judgment of the European Court of Justice, but ultimately did not change the legal situation, especially since it is not responsible for this question. Nevertheless, the ECB would certainly not willfully provoke a dispute in any court.
From a purely economic point of view, the bond purchases can already be classified as state financing. As long as inflation was too low, that wasn’t a problem. On the other hand, when inflation is high, government bond purchases can drive prices even higher because bond purchases depress long-term interest rates, which means easy monetary policy.
The paradox, however, is that precisely when the ECB specifically helps only individual states and is thus even more exposed to the accusation of state financing, it has to buy fewer bonds overall and can allow interest rates to rise faster across the board and fight inflation better.
What new concept is the ECB developing?
A “new instrument” is currently being discussed, but the concept has apparently not yet been finalised. There is speculation that the ECB will, if necessary, buy bonds from highly indebted countries and at the same time sell bonds from more stable countries such as Germany. This would separate the containment of a possible euro crisis even more clearly from general monetary policy.
At the same time, the ECB would intervene even more specifically than before in financial policy and continue to override market forces. This would reduce the incentive to pursue a sound financial policy even more.
More: The ECB promises to keep the euro area together