The European Central Bank has announced new instruments to prevent another euro crisis. After a special meeting scheduled at short notice on Wednesday, the monetary authorities announced that the funds from the expiring bonds of the Corona emergency purchase program PEPP should preferably flow into new government bonds from heavily indebted euro countries. In addition, new anti-crisis instruments should be developed as quickly as possible.
In the highly indebted countries, interest rates on the capital markets had recently risen particularly sharply after the ECB announced last week that it would raise interest rates in the summer and stop the programs to buy new government bonds. It is feared that countries like Italy and France will not be able to cope with the higher interest rates. That is why the ECB wants to treat these countries differently than Germany, for example, in the course of tightening monetary policy.
“The pandemic has left lasting vulnerabilities in the euro area economy, which are indeed contributing to an uneven transmission of the normalization of our monetary policy to the individual countries,” officials at the central bank said on Wednesday.
However, the “functioning of the monetary policy transmission mechanism” is “an indispensable prerequisite” for the ECB to be able to meet its main goal of stable prices with a medium-term inflation rate of two percent, said the currency watchdogs.
The central bank thus wants to prevent interest rates for government bonds in Europe from drifting apart. However, the yield difference – the spread – between government bonds from Germany and those from more heavily indebted euro countries has widened recently. In Italy, for example, the interest rate for ten-year government bonds climbed back above the four percent mark. At the end of March it was only half as high. Means: For countries like Italy it will be more expensive to get fresh money. The ECB wants to counteract this with the new measures.
The announced ad hoc meeting initially caused price gains on the European markets: In Paris, the stock exchange opened with a plus of 1.22 percent, in Frankfurt with plus 1.32 percent. The price gains could even be expanded in the afternoon. The Frankfurt Stock Exchange had previously opened with price losses six times in a row. There was a slight disappointment on the bond markets after the ECB announcement.
The financial and budgetary policy spokesman for the CSU state group in the Bundestag, Sebastian Brehm, described the ECB meeting as a “clear monetary policy warning signal”. The ECB has neglected currency stability in favor of state financing in southern Europe and has thus taken the pressure off for reform.
However, according to Ulrike Kastens, an analyst at fund provider DWS, the announced measures should give the ECB the opportunity to raise interest rates faster and more aggressively “as spread widening is limited to a certain extent”.
