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The EZB has become the cash point of the European Club Med.The Neue Zürcher Zeitung writes:


No sooner have Italy's financing costs risen than the ECB launches a new government bond-buying program, because otherwise monetary policy will allegedly not work properly and interest rates will deviate too much. The argumentation is perfidious because it can be used to justify almost anything. In this way, the ECB is abandoning its mandate of price stability.

The priority of the European Central Bank (ECB) became obvious on June 15: On that hot summer day, the Governing Council convened for an emergency meeting, not even a week after its regular meeting. The yield on Italian government bonds had climbed to 4.2 percent, 2.4 percentage points above its German counterpart - apparently an alarm signal from the ECB's point of view. By contrast, inflation, which is shooting ever higher at almost nine percent, has never been worth an emergency meeting for the central bank, even though inflation in some euro countries has been in double digits for months and recently reached an outrageous 23 percent in Estonia. The development shows the ever-increasing Mediterraneanization of monetary policy.

The ECB has long cared lovingly about favorable financing conditions for the member countries of the monetary union. In recent years, it has purchased a total of around 4.3 trillion euros in government bonds with money newly created out of thin air. At times, the central bank financed the entire net new debt of the member states. At first, this was done to boost the economy and thus the inflation rate, which was considered too low. For a long time, the inflation rate fluctuated between zero and two percent, slightly below the ECB's medium-term target of two percent. It then bought government bonds to support member countries during the Corona pandemic.

Invariably, this had the pleasant side effect for the finance ministers of the euro countries - or was it even the main objective? -that the central bank protected them from market-based interest rates. For some observers, this was tolerable at first because inflation in the euro zone was low. But with inflation rates picking up considerably since the fall of 2021 - well before Russia's invasion of Ukraine - the "monetary guardians" came under pressure. After an agonizingly long hesitation, the ECB's Governing Council ended government bond purchases this summer and held out the prospect of a first key interest rate hike, which has since been implemented.

Rising inflation rates combined with the cessation of government bond purchases and the prospect of rising key interest rates caused interest rates to rise sharply on the capital markets. In Italy, the government crisis surrounding Prime Minister Mario Draghi, the former head of the ECB, further fueled the rise in interest rates, driving up interest rate differentials versus German government bonds. But this time the ECB did not hesitate for long, but announced the preparation of a new government bond purchase program in the crisis meeting mentioned at the beginning. In the meantime, the ECB Governing Council adopted the so-called "Transmission Protection Instrument" (TPI).

It could be activated to counter unwarranted and disorderly market dynamics that posed a serious risk to the transmission of monetary policy throughout the euro area. In this way, the ECB wants to prevent an alleged fragmentation of the euro area, i.e., an excessive dispersion of interest rates. To justify this, the central bank claims that the risk premiums demanded by investors could rise above the level justified by a country's fundamentals.

In doing so, the ladies and gentlemen of money at the ECB's Frankfurt headquarters arrogate to themselves a knowledge they do not and cannot have. The level of interest rates for a country at any given time always depends on countless factors and is ultimately formed on the basis of the swarm intelligence of financial market players. When the ECB raises the question of whether a certain interest rate level is still justified, its answer will always be deeply interest-driven and ultimately political. Once again, the ECB is entering the field of fiscal policy.

"Will Europe's new TPI be an ATM?" asks Willem Buiter in a guest post on the Project Syndicate platform. In it, the former member of the Bank of England's Monetary Policy Committee explains why the answer is "yes." Buiter's concerns are shared by many observers in Europe. German economists Volker Wieland, Clemens Fuest and Lars Feld recently described the purchase program as "toxic for the monetary union," and rightly so. For Wieland, the TPI sends the devastating signal that unsound fiscal policy is being rewarded. Such misguided incentives are steering the euro zone increasingly toward a debt union that is held together only by the solidity of a few states. This cannot go on forever.


The disruption of the monetary policy transmission mechanism and the fragmentation of the euro area are at the heart of an argument that is ingenious from the ECB's point of view and at the same time perfidious from the critics' point of view. It allows the ECB, for a supposedly good cause, to level interest rates in the euro area so that monetary policy works better. The term transmission mechanism, however, is extremely malleable. It provides an excuse to be able to do all sorts of things. But from an investor's point of view, there may be good reasons for different interest rates, such as high debt, poor growth prospects, a government crisis, or external shocks like a pandemic or war. Organizing cohesion in Europe in such crises is the job of politicians, not the central bank.

The ECB should also make monetary policy for the entire euro area and not for a single country. Nor does it care about the 23 percent inflation in Estonia. If the monetary impulse in an important country is diminished, for example because there is a government crisis there, as was recently the case in Italy, this should not be used as an excuse to try to pinpoint the country's financing costs. As long as there is only a common monetary policy in the euro zone, but no common fiscal policy, varying interest rates were and are the most normal thing in the world, as are varying inflation rates.

The only sustainably effective bulwark against dangerously high interest rates, a fragmentation of the euro zone and a new sovereign debt crisis are sound public finances combined with growth-friendly economic policies. Here, pressure from the financial markets helps governments to stay on or return to the path of virtue. However, the ECB's anticipatory obedience shields countries from precisely this pressure from the markets. In this way, the central bank turns the level of interest rates into a (monetary) policy issue and itself into the beadle of the member countries.

Moreover, the creation of the TPI would not even have been necessary, because the OMT program (Outright Monetary Transactions), which was adopted in 2012 under Mario Draghi and has since been legally secured, provides an instrument to help countries in financial distress. However, states wishing to benefit from the OMT must submit to strict conditions. The most important prerequisite for using the OMT is that the country in question already benefits from a European bailout and meets the relevant conditions.

Draghi, who was as celebrated as he was controversial, once attached great importance to this conditionality. He described it as a fundamental element in ensuring the ECB's monetary independence and minimizing misguided incentives that lead to an even more lax fiscal policy. Now, by contrast, the ECB has set only waxy criteria for the use of the TPI. For example, the member state government must comply with the EU's fiscal framework, and the country must not have serious macroeconomic imbalances.

The TPI is ultimately the Rolls Royce among government bond purchase programs: unlimited purchase volume, unlimited purchase duration and equal treatment of all claims (pari passu). Compared to OMT, it offers better financial support with much lower conditionality. This makes it clear which program highly indebted sovereigns may want to and will use. Its initialization shows that the ECB is under considerable fiscal dominance of "Club Med," i.e., the highly indebted member countries on the Mediterranean. At the same time, this fiscal dominance will increase as a result of the TPI, as debt will continue to rise and it will create new desires.

A good twenty years after the introduction of the euro, the majority in the Governing Council of the ECB has managed to make the central bank increasingly abandon its mandate of price stability and instead concern itself with the cohesion of the euro area as it is constituted today. In this way, the ECB is increasingly undermining the meaning and wording of the European treaties, which postulate and promise financial and price stability. The announcement of the "Transmission Protection Instrument" is another milestone in the ECB's subjugation to the "Club Med" and its financing needs.
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