Christine Lagarde, President of the European Central Bank (ECB)
Image: dpa
The latest decisions on the European Central Bank’s bond purchases are legally questionable and strategically extremely clumsy, write guest authors Laus Adam and Hans Peter Grüner.
In December 2021, the Governing Council of the European Central Bank rightly decided to end its Pandemic Emergency Purchase Program (PEPP). Anyone who now believes that the most important program to stabilize the European bond markets during the pandemic is about to end is far from it. In March 2020, at the beginning of the pandemic, the PEPP had its place. It was intended to cushion the economic consequences of the pandemic, was set at 750 billion euros and was limited in time. Since then, the purchase framework has more than doubled to a total of 1,850 billion euros. The extensive stabilization programs of governments and central banks around the world, as well as the vaccination campaigns, have now had an effect. The economy has stabilized and the Governing Council decided in December 2021 to end bond purchases under the PEPP by March of this year.
It would be a mistake to conclude from this that the ECB is ending crisis mode. Because in December, the Council made another decision that unfortunately received too little attention: the securities in the PEPP portfolio that are due before 2024 must be reinvested in full. That means the volume of the program will not shrink in the next two years. Interestingly, this is the second time the purchase program has been extended. As a result, the ECB has – without much publicity – created a powerful purchase instrument whose permanent availability only requires a small further step, namely a further extension of the reinvestment period beyond 2024.