As expected, the Governing Council of the European Central Bank (ECB) decided to make no changes to its monetary policy tools today. The Eurosystem will continue to manage its bond purchases under the PEPP crisis programme in order to prevent a significant rise in interest rates. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

ZEW economist Professor Dr. Friedrich Heinemann in a commentary on the latest decisions and changes of the ECB.
Professor Friedrich Heinemann, head of the ZEW Research Department “Corporation Taxation and Public Finance”.

“Yesterday’s ruling by the Federal Constitutional Court, which cleared the way for the EU’s recovery plan, has taken the pressure off the ECB’s Governing Council in the short term. The ECB is no longer alone in its responsibility to ensure the smooth financing of the high pandemic-related government deficits in the euro area. As early as mid-2021, the European Commission will issue the first common EU bonds and start transferring billions to the cash-strapped Member States. But the ECB also remains highly important for the smooth financing of this EU debt, even if indirectly. For there is no doubt that the central banks of the Eurosystem will be the main buyers of the new EU bonds. The highly indebted states of the eurozone thus continue to depend directly and indirectly on the ECB’s purchases.

It is foreseeable that decision-making in the Governing Council will become much more controversial in the second half of the year than it has been so far. As the inflation rate of the euro rises and the economic recovery continues, the question of when to start phasing out the PEPP programme is becoming more pressing. PEPP has moved the ECB much closer towards engaging in illicit monetary state financing and can therefore only be justified as an exception in a serious crisis situation. The ECB must slowly develop a credible perspective for exiting the PEPP programme.”

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The Governing Council of the European Central Bank (ECB) decided not to further ease its monetary policy and not to expand its Pandemic Emergency Purchase Programme (PEPP). Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“The industry in the eurozone is recovering significantly despite the second wave of Covid-19. So there is currently no need to discuss an expansion of the already exceptionally expansive monetary policy. For the time being, the ECB’s PEPP is perfectly equipped. This is also reflected in the new announcement that the full budget of 1,850 billion euros does not necessarily have to be used up by March 2022. Currently, it is becoming increasingly clear how problematic the incentive effect of the programme is: even the latest turmoil in the Italian government has not had a significant impact on the historically low Italy spreads. The market has largely ceased its remedial function as a watchdog for the policies of the euro states. Investors now seem to be unanimous in their view that the ECB will guarantee the liquidity of all euro states at all costs, no matter how well or badly the governments perform. The ECB Governing Council is currently facing a delicate communicative mission. The ECB is preparing the public for an at least temporarily significant rise in inflation at the end of the Covid-19 pandemic. In doing so, it will accept a price increase rate that is even above the previous inflation target without exiting from the massive government bond purchase programme.”

At today’s meeting, the Governing Council of the European Central Bank (ECB) decided not to further expand its Pandemic Emergency Purchase Programme (PEPP). For the time being, purchases will continue as planned with a total envelope of 1,350 billion euros until June 2021. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on this matter.

“It is to be welcomed that the Governing Council does not increase the dose of its bond purchases at every meeting. At the EU summit this weekend, the ball is in the court of the EU and its Member States. They must come up with a much more convincing reconstruction plan than the Commission’s politically motivated ‘Next Generation EU’ recovery fund.

An effective EU plan could relieve the ECB of some of its responsibility for distressed euro countries. After all, the price that the ECB is paying for the billion-euro government bond purchases is already high. The purchases are making the balance sheets of the euro central banks increasingly dependent on euro countries that have become critically indebted. Having lifted all previously still existing limits in March, the ECB is also edging ever closer towards engaging in the kind of monetary state financing banned under EU law. In the acute phase of the coronavirus crisis, the Governing Council would therefore be well advised to consider the negative side effects of the PEPP more carefully.”

Further background information on the PSPP/PEPP in the ZEW expert brief 20-11

As of today, the Governing Council of the European Central Bank (ECB) has not yet decided to further increase its Pandemic Emergency Purchase Programme (PEPP), which the Council launched in March with an initial volume of 750 billion euros by the end of the year. The Council did, however, declare its full readiness to extend the programme for “as much and as long as necessary.” Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments.

“Even though the ECB didn’t further increase its purchase programme PEPP today, it’s still playing a key role in protecting the eurozone from a new debt crisis. The Eurosystem’s substantial purchases of Southern European government bonds are reflected in the relatively low interest rate premiums on Italian government bonds. Yields are remaining moderate, though the country’s credit rating is deteriorating and approaching a junk status. Behind the low-risk premiums are investors’ expectations that, while the coronavirus recession rages on, the ECB will increase the PEPP by trillions and buy as many Italian bonds as necessary.

ECB crisis operations are highly effective in the short term. They cannot, however, provide an answer as to how Italy will be able to finance a debt level of 150 per cent of its GDP and higher after the crisis. Though the Governing Council of the ECB is currently performing intensive care on the economic survival of certain euro states, this should not be confused with some miracle therapy promising full-on recovery.”

The Governing Council of the European Central Bank (ECB) announced a comprehensive policy package, as the corona pandemic continues to cast a shadow over the dramatically declining inflation and growth expectations in the eurozone. Firstly, the central banks of the Eurosystem will expand their asset purchase programmes by 120 billion euros until the end of the year, focusing particularly on corporate bonds. In addition, new targeted longer-term financing instruments at negative interest rates will be put in place to boost liquidity among European banks with the aim of supporting bank lending to small and medium-sized enterprises, which will be particularly hard hit by the corona crisis. The key interest rates, on the other hand, remain at the current level. Professor Friedrich Heinemann, head of the Research Department "Corporate Taxation and Public Finance" at ZEW Mannheim, comments on the ECB's decision. 

“The stimulus package is well-balanced and takes advantage of the very limited options left to the ECB in order to mitigate the inevitable corona recession. By expanding asset purchases and targeted longer-term refinancing operations (TLTROs), the ECB aims to ensure bank lending to businesses that are particularly affected by the corona crisis. This is a sensible approach. Christine Lagarde made a smart move today by refraining from announcing another interest rate cut. Pushing interest rates even further into negative territory would not have helped, but would rather have exacerbated the situation of distressed banks.

Those hoping for a ‘whatever it takes’ moment from Christine Lagarde had unrealistic expectations in the first place. The economic crisis triggered by the virus cannot be contained by monetary policy measures. The ball is now in the court of fiscal policymakers. Fiscally sound Member States should therefore use their room for manoeuvre to prevent Europe from slipping into a dual crisis of the real economy and the financial economy. Ursula von der Leyen will now have to follow the lead of Christine Lagarde and negotiate a European stabilisation programme with the EU governments.” 

At its second meeting under the recently appointed ECB President Christine Lagarde, the ECB Governing Council decided to make no further changes to its monetary policy. This leaves the deposit rate at its current level of minus 0.5 per cent. Furthermore, the net purchase of assets with a monthly volume of 20 billion euros, which were taken up again in November 2019, will be continued. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at ZEW Mannheim, comments on the Federal Statistical Office’s calculation.

“The opinion still prevails in the ECB Governing Council that, for the time being, the eurozone cannot do without the stimulus provided by negative interest rates and bond purchases. Only a truly substantial economic recovery could bring about a change of mind, but that is not yet in sight. In any case, the focus of monetary policy this year is not on interest rate decisions, but on the general review of the pursued strategy. The outcome of this review will determine whether the use of negative interest rates can be discontinued in about two years’ time or whether it becomes a permanent feature of euro monetary policy.”

Date

22.04.2021

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