The ECB must give way to the ESM - Stefano Micossi

The following is a translation of an article that appeared in Il Sole 24 Ore on June 12, 2022

  

The announcement made by the European Central Bank concerning the end of its interventions on sovereign bonds and the necessary and inevitable increases in official interest rates had immediate repercussions on the spreads of Greek and Italian public debt securities over the German Bund. The markets and the public are finding it difficult to understand the communication strategy of the ECB, which has hinted in recent weeks that it could at the same time restrict liquidity, preserve growth and manage possible tensions in countries with high public debt.

The violent reaction of the European markets to the decisions of the ECB Governing Council and to the press conference of President Christine Lagarde seems to confirm that the overly reassuring signals sent to investors by the ECB in recent weeks had led them astray.

Since the ECB will have to do more tightening in the coming months, it is time now to discuss what the central bank refused to do earlier about what can really be done to curb further tensions.

The first assumption I will draw from the recent events is that the anti-spread shield that the ECB is flashing in front of investors is not feasible. In fact, in order to maintain the desired degree of restriction at the same time, the central bank would be required to buy Italian bonds by selling German bonds in its portfolio to the market. Even German "dove" Isabel Schnabel could not go that far; certainly the majority of the Governing Council would object. Therefore, the ECB should firmly understand, as I have been saying for some time, that the task of fighting the increasing spreads is not its competency, neither on the basis of its mandate, nor in practice because it is incompatible with the need to tighten liquidity.

Are there alternatives? Certainly. The alternative is to delegate the ECB’s task of managing eurozone sovereign debts to the European Stability Mechanism (ESM), the instrument created by the European Council with the specific mission of preserving the financial stability of the eurozone, as the Pringle judgment of the Court of Justice of the European Union has made clear. This function is separate and independent from monetary policy, whose main mission is to ensure price stability. By trying to mix the two functions, the ECB is confusing investors.

To allow the ESM to perform this function, it should be authorized to buy more of the sovereign bonds held by the ECB, offering as payment its liabilities in euros, for which there is ample and even excessive demand on the capital markets. The ESM could then manage those bonds as a true public debt agency of the euro countries, guaranteeing their rollover indefinitely.

A study of mine published with CEPS and Luiss SEP last November (“On the selling of sovereigns held by the ECB to the ESM: a revised proposal”) contains the technical details, as well as a demonstration that the ESM can perform this function without the need to change its founding treaty.

The ECB has for months refused any contact to discuss this scheme, along with others promoted by various colleagues (see my editorial on VoxEU from April 1). It seems that now the facts are proving me right. But who knows if the ECB will want to listen?