President of the European Central Bank, Christine Lagarde, in February.



Mario Draghi

during his presidency of the European Central Bank, there was something that his successor

Christine Lagarde

is forced to accept another version: the only thing we can do. This is the best lecture on the expansion of pandemic bond purchases, likely to be announced on Thursday.

1.35 trillion in quantitative easing, under which the ECB has committed itself to purchase government and corporate bonds until at least June 2021. Moreover, it is the only pan-European response to the pandemic that has crossed the border. The Brussels plan of 750 billion euros for social security and public works is linked to the political controversy.

In the absence of action from other political leaders, he returns to Frankfurt for further support. Investors are expecting an increase in monetary support this week – perhaps another EUR 500 billion – and an extension to 2022.

Don’t ask what practical consequences this may have, because the answer is weak. The ECB is no longer in a position to fully implement the EPPP as such. At the current rate of monthly purchases, there would still be some money left when the programme ends in June.

This also applies to Europe, which is not burdened by financial panic. Mrs Lagarde, together with her colleagues from the other major central banks of the world, performed her main function in the spring, when the ECB’s measures prevented the spread of the virus infection in the financial system. Since then, interest rates have remained limited. Government bond yields have become negative even in the event of budget delays, as is the case in Portugal, and Italy is close to historical lows.

The reason for greater EQ is that these low yields can keep some banks in the eurozone alive despite a pandemic recession, inflating the value of the bonds on their balance sheets. But there are costs.

On the one hand, Mrs Lagarde’s expansionist incursions increasingly call into question the political and legal foundations of the eurozone. The purchase of government bonds under the EPPP and the initial quantitative easing programme will be calibrated on the basis of each country’s contribution to the ECB’s capital.

Mrs Lagarde, however, departs from this objective, as the diary of the German think tank ZEW writes this week. The ECB has been considered in Italy, Spain and France, but underweight in Germany and the Netherlands. This helps those who need it most, but it also makes the ECB look like a mechanism for transferring fiscal prudence to disregard. It is politically toxic in the eurozone.

Another risk is that Ms Lagarde will tie her hands further in the future if the ECB enforces the end of the CPTPT. This should be an emergency program, but the emergency will end with the Kovid-19 vaccines currently being introduced. The promise to expand and extend the EPP will certainly make it difficult for Ms Lagarde to withdraw. It will have to fight the markets in anticipation of the EQ.

Mrs Lagarde may feel that, given the political demands, she can do little more than paralyse Brussels or the national capitals. But this money is subject to important political conditions. Investors who have laid eggs on the ECB need not worry about that, but Mrs Lagarde does.

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