“Without an Exit Perspective, Accusations of Monetary State Financing Are Increasingly Difficult to Refute”

The Governing Council of the European Central Bank (ECB) has decided to expand the size of its pandemic emergency purchase programme (PEPP) by 500 billion euros as well as to extend its earliest end date by nine months until March 2022. Furthermore, the Council has postponed the start of net repayments under the PEPP until 2024 at the earliest. The ECB is thus reacting to the renewed economic slowdown caused by the second wave of the COVID-19 pandemic. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance”, comments on this matter.

“The ECB is increasingly at risk of losing its grip with its massive government bond purchases and the most recent extension of its duration. If even ten-year Greek government bonds only have a yield of 0.6 per cent despite the country’s continuing over-indebtedness, then this is clearly out of proportion. It is indeed sensible for the ECB to prevent excessive interest rate spread during the crisis. However, the almost complete levelling of government bond yields in the euro area has now reached an extent that is no longer reasonable. In addition, euro central banks are buying a disproportionate amount of government bonds of a few highly indebted countries. For example, Italian government bond purchases have deviated from the capital key by as much as 25 per cent since March. Thanks to the approval of effective vaccines, the containment of the pandemic by the end of 2021 is now highly realistic. Against this background, the ECB must finally make preparations to reduce the now de facto total dependence of southern European states on central bank money. The big task for the ECB Governing Council in 2021 will be to communicate the exit from bond purchases carefully and yet credibly. The amount and structure of these purchases cannot be justified for longer than the newly announced date, i.e. March 2022. Otherwise, the accusation of engaging in monetary state financing will become increasingly difficult to refute, even with the most benevolent assessment of the ECB’s actions.”