“The European Central Bank is not doing anything and will not do anything yet, because it has no room and will more or less pray that the inflation episode will remain an episode. The central bank must be careful not to bankrupt countries such as Italy or Greece. They simply cannot afford to pay significantly higher interest rates, ”says Conseq CEO Jan Vedral.
The European Central Bank has been holding its key interest rate negative for almost eight years. It sent the rate to zero in July 2012. At the same time, it did not tighten its monetary policy even during the recovery in the period preceding the pandemic. In addition, during October and November, it bought euro area government bonds every month, regardless of their risk and yield, amounting to 90 billion euros.
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Inflation. It has become the most expensive in the last 13 years • VIDEO Videohub
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Month after month, eurozone governments can now get into debt of two and a quarter trillion crowns without having to motivate investors with higher interest rates. The ECB buys everything, regardless of zero or negative interest or the risk that the securities may not be repaid at all.
“The ECB is trapped in fiscal policy. It is pulling a huge thorn out of the most troubled eurozone countries, but it is not using its creditor capabilities and is not putting enough pressure on troubled member states to consolidate fundamentally fiscally, ”explains Petr Zahradník, an economist at Česká spořitelna and a member of the European Economic and Social Committee.
According to him, the situation worsened with the arrival of the current head of the ECB, Christine Lagarde. While its predecessor and current Italian Prime Minister Mario Draghi has repeatedly opened up the issue of budgetary discipline, at least verbally, now the ECB’s pressure for responsible financing of eurozone governments has virtually ceased.
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“Lagarde reminds me more of the French Ministry of Finance’s branch in Frankfurt. This trap was created by the fact that individual key EU institutions do not all fulfill their obligations and some try to replace the roles of others, “adds Zahradník.
A loan like a great government business
The central bank buys government bonds regardless of interest rates, which means that eurozone governments are finding the easiest and often cheapest money to earn in history. The sustainability of public finances in the country does not matter. For example, at the height of the debt crisis in 2012, private investors were willing to lend to the Athens government for ten years at an annual interest rate of 37 percent. Thanks to the support of the ECB, Greece, which is still extremely indebted, will now receive the same loan at an annual interest rate of 1.4 percent, ie half of what the Czech state does. At the end of the summer, this interest was only half a percent.
“The stability of the eurozone would be in jeopardy, so the ECB has no choice but to buy the bonds of highly indebted countries. This is a kind of tax for maintaining the whole, “says Jiří Tyleček, an economist at XTB. According to him, no one solves the so-called Maastricht criteria concerning the indebtedness of economies. “As a result, the debt of many countries is higher than it was during the euro crisis ten years ago,” adds Tyleček.
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In addition, the ECB even pays for the bonds purchased in economically stronger eurozone countries. Berlin or Paris, for example, collect an annual interest rate of half a percent on a five-year loan in the form of bonds purchased by the ECB, so not only does nothing prevent greater indebtedness, but it also becomes a benefit to the budget.
However, negative yields, and thus collection for the borrowing state, are currently “offered” by government bonds of most euro area countries, so even the aforementioned Greece currently earns on its six-month loan. Ten years ago, Athens had to pay 25 percent a year for the same loan.
Compared to last year, prices in the euro area rose by almost an incredible 4.9 percent by European optics in November. Eurostat data have not offered a similarly high number in any month since at least January 1997, ie from the moment the European statistical portal offers publicly available electronic data.
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“The ECB argues, and perhaps still partially believes, that current inflation is a temporary phenomenon and highlights divergent economic developments across the euro area and the economic risks associated with the pandemic. He is also aware of the dependence of a part of the corporate sector on cheap financing, “says Martin Řezáč, Chairman of the Association for the Capital Market of the Czech Republic. “Even if the ECB never admits it, at least some ‘reasonable’ inflation is needed, because in inflation money, debts are simply better repaid,” he added.
Inflation as a universal therapy and the independence of the ECB as a utopia
In this context, economists believe that the era of true independence is long overdue by the European Central Bank. “According to economists, the ECB’s monetary policy and the fiscal policies of the individual euro area member states have merged into one highly dependent and interconnected whole,” says Michal Stupavský, an economist at Consequ.
ECB bankers are said to be indirectly fulfilling the wishes of European politicians. “The ECB is not truly politically independent. In practice, it is subject to the fiscal policy of the largest European economies and liquidity requirements in the financial system, “says Finlord economist Boris Tomčiak.
According to economists, the problem is also the number of economically differently performing states that the ECB manages. “The result is a certain caution and perhaps cumbersome decisions when deciding on a more significant change in the direction of monetary policy,” emphasizes Radomír Jáč, Chief Economist, Generali Investments CEE.
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