The Risk of Turbulence on the Bond Market is Growing

The European Central Bank’s (ECB) latest monetary policy decision still does not give a clear indication of what will happen to its bond-purchase programme from October 2018 onwards. The ECB stands by its resolution to continue making monthly bond purchases to the sum of 30 billion euros as part of the programme until at least September 2018, “or longer if necessary”. Once again, the decision made by the ECB Governing Council even includes a statement that the programme could be expanded if the economic outlook worsens. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), Mannheim, comments on the ECB’s decision.

“The gap between the strong economic climate in the Eurozone and the ECB’s still very cautious tone is growing ever wider. It is regrettable that the ECB is not offering the markets sufficient indication of when the bond-purchase programme might come to an end. Recently, the focus of the programme has shifted noticeably towards purchasing bonds from the Member States with the highest levels of debt. In doing so, the ECB is taking increasingly high legal and economic risks.

In legal terms, the programme is edging closer with each passing month towards engaging in the kind of monetary financing banned under European law. From an economic perspective, if the ECB surprises the markets by putting an abrupt end to the programme, this would increase the chance of turbulence on the bond market. This is a particular risk for the Italian government bond market, with parliamentary elections in March already set to trigger increasing uncertainty.”

For further information please contact:

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de