FRANKFURT (Reuters) – As the euro zone begins to emerge from the depths of the economic downturn, the European Central Bank is embarking on a difficult balancing act between supporting debt governments and keeping creditors on their side.
Encouraged by the ECB’s big bond buying program and ultra-low interest rates, national governments have taken out a mountain of new loans to reduce the spread of coronavirus infection, pushing total public debt to 102% of its output. area.
With the recovery of the euro zone seen to go down the United States or Asia, these countries will not grow out of debt or see it eroded away by rising prices anytime soon.
But Bundesbank President Jens Weidmann has made it clear that he expects monetary policy to return to normal when inflation returns.
That means President Christine Lagarde and her colleagues must strike a difficult balance between the need to maintain credit easily enough for weaker lenders like Italy as long as they do not lose support from countries. credit.
“I think the ECB is locked up,” said Friedrich Heinemann, a professor at the ZEW institute in Germany.
“Some heavily indebted countries can no longer cope. The big question here is Italy’s debt, ”he said of Rome’s 154% debt / GDP rate.
ECB chief economist Philip Lane has rejected the idea that the bank’s policy is constrained, saying in an interview with Reuters last year that he was confident the bank could abandon its bond-buying programs when which inflation would allow to do.
It is very likely that this will never happen soon.
JAPANESE LIFE
The ECB has already been buying government bonds for six years, trying but largely failing to take sufficient action to meet the inflation target of nearly two percent.
Despite the expected rebound in eurozone prices this year due to one-off factors and rebound profitability in the United States, there is no sign of a steady return to higher inflation rates on the sidelines. this of the Atlantic Ocean.
This is due both to the aftermath of the pandemic, which destroyed millions of jobs, and structural factors holding prices such as an aging population, relentless technological advances and markets. globally competitive product.
Even if inflation reached 2%, Lagarde could argue that too much movement should be allowed for some time after it has been below the target for more than a decade.
This argument, on loan from the Federal Reserve, is being discussed as part of an ongoing review of the ECB’s policy strategy.
That should justify Lagarde to keep rates low and perhaps even continue to buy bonds for a long time, as the Bank of Japan has been doing.
“This is the Japanese way of handling the problem,” said Philipp Vorndran, a strategist at asset management company Flossbach von Storch. “A state can operate at zero level for eternity if people do not lose trust in money.”
Graph: Italy’s Debt to GDP Ratio –
Buying BONDS
The ECB has bought 3 trillion euros worth of government debt and has pledged to stick with it until the coronavirus crisis is over and replace mature bonds for even longer.
For now, Lagarde is free from some of the problems of eliminating her ex-population, most notably a lengthy court controversy with German suspects over the legitimacy of the purchase of bed-bound bonds following a constitutional ruling in the United States. May last year.
The European Union is finally making progress on fiscal issues, issuing for the first time large sums of joint debt to finance a 750-billion-euro pandemic recovery fund – bringing more opportunity for the ECB to buy bonds and reduce pressure on some of the weakest members of the bloc.
Former Italian Economy Minister Roberto Gualtieri had pledged to bring Italy’s debt ratio back down to 2019 levels by 2030 through growth and investment, while the appointment of ECB vice-president Mario Draghi as prime minister boosting investor expectations for growth-friendly reforms.
It is too early to say whether the rising euro zone debt mountain will become a topic for conservatives in the German federal election in September – but for now, coalition sources say they are clear guidance from any discussion of ECB policy.
But she still has a bit of certainty to do.
Beyond Weidmann and other allies on the ECB’s Governing Council, low rates have lost savers, which have resulted in the disappearance of fixed-income investments and skyrocket property prices in some areas.
Ironically, inflated asset prices make it even more difficult for the ECB to tighten policy if necessary as this could trigger an economically disruptive approach.
This and the unspecified need to help governments overcome their debt, known as “fiscal leadership”, meant that the ECB had little choice but to keep the money taps open in the future .
“It is not only fiscal leadership that limits the ECB’s ability to counter inflation but also the dependence of low-yield financial markets,” said Luis Garicano, a Spanish member of the European Parliament and professor of economics. at IE Business School.
Further commentary by Giselda Vagnoni in Rome; Edited by Mark John and Toby Chopra