Lagarde's Bazooka: 1,35 trillion euros for bond purchases

The sums are enormous, and at the end of the governing Council of the ECB exceeded expectations: a Further 600 billion euros is to be invested in the purchase o

Lagarde's Bazooka: 1,35 trillion euros for bond purchases

The sums are enormous, and at the end of the governing Council of the ECB exceeded expectations: a Further 600 billion euros is to be invested in the purchase of government bonds of the Euro zone, the economic crash caused by the Corona-crisis intercept. Thus, the PEPP (Pandemic Emergency Purchase Program), the program will grow to 1.35 trillion euros, and until the summer of 2021 extended. With the purchase of the bonds, the ECB will provide cheap money available so that banks can provide the economy with sufficient credit. The most highly indebted countries such as Italy, which would otherwise have to pay on the financial market, higher interest rates will benefit. The ECB interest rate remains at zero percent at historic lows.

With the Bazooka against the economic crash

"recent signs point to a sharp downturn, with a quick crash on the labour market, in industry and in services," says ECB Chief Christine Lagarde. The reason for the decision to increase the money blessing by PEPP significantly, the expectation that the Eurozone will shrink this year to 8.7 per cent and the Outlook remains uncertain whether.

Therefore, according to Lagarde, have decided to the governing Council by a large Consensus that the provision of a further 600 billion was the right Signal: "the size of The program is appropriate to meet the needs." And since the ECB has to keep Inflation on course, only 0.1 percent weakness as a result of the low Oil price and because of the demand in may of fraud, hopes the President on a return to normalcy (that would be an inflation rate of around two per cent) in the summer of next year.

There was also a Wink to the Federal constitutional court, whose critical judgment to the previous bond-buying program, PSPP had provided at the beginning of may for the insurrection: "The ECB considers regularly the costs and Benefits of their actions, in great depth and this is also reflected in their publications again." The Federal constitutional court had not complained of, among other things, that the Bank on the proportionality of their programmes is instructive. The present Corona-support program PEPP but I have proved its success already: "It's the Downward spiral has prevented the financial market, otherwise we would have been in a much more difficult Situation," said Lagarde.

Otherwise, the judgment of the German court was a case for the Federal government, because the ECB, under the Jurisdiction of the European court of justice, dismissing the Frenchwoman cooling. But Christine Lagarde, believes that "a good solution" could be found, that will not compromise the primacy of the European court of justice.

Huge cash injection with a limited effect?

"so Far, the impact of asset purchases on the yield curve and the level of Inflation was very manageable," criticized the CSU MEP Markus Ferber. "If more and more of the same medicine is actually the solution, is more than doubtful."

In addition, he also criticized that the ECB does exceed their purchases of the capital key, that is the proportion of Euro-member countries, in part. So to 21.6 percent, Italian bonds were purchased, where Italy is, according to its capital key, only 17 per cent. In the case of France, however, a lot of air is still up for the purchase of government bonds and Germany is even involved to a disproportionate extent.

"If the ECB deviates systematically from the capital key and no upper limits are set, you must allow yourself to accusations of monetary state financing, like it," alleges the Deputy. He sees this as, further legal problems, the Central Bank, prohibited the state funding expressly by contract.

Not a Draghi Moment for Lagarde

Some observers, the increase of PEP for the "Draghi Moment" by Christine Lagarde. The former ECB President, had declared after the 2008 financial crisis, measures to stabilise the Euro with the phrase "Whatever it takes" for unlimited. Daniel Gros of the Brussels Center for European Policy Studies, sees now, not a repetition: "It is a great monetary injection, but it is not 'Whatever it takes' ". That the ECB would buy long bonds until the Inflation goes up again, this is not new.

The economic expectations are now a bit worse than before, and in view of this, Gros is called the increase of the bonds is a sign of helplessness purchases. "This is the Only thing you can do. But I personally don't think it helps a lot." The recovery depends to 95 per cent of the development of the Corona of a pandemic and perhaps to five per cent of the monetary policy. But in the case of the ECB, the principle applies: "We must do something. And if the agent does not help, you have to double the dose, or quadruple."

with regard to the Differ from the credit key, says the Economist: "despite the reaction, I can understand it, but in the long term, it is not wise". You wait in Frankfurt now, what the lawyers say to the flexibility in the extended PEPP, waiting for more actions and hopes for the Best.

The correct response to the crisis

financial expert Grégory Claeys from the Bruegel Institute in Brussels, defends against the increase of PEPP vehemently: "It is the appropriate response to the worst recession we have ever seen." It is logical and justified, now such a large package to submit to the rapid fall of Inflation.

"What we need at the Moment is a fiscal response to a crisis is not a financial crisis. Now, governments can help by money in the economies of pumps. No one is to blame for the situation, it is an external shock. But we need to prevent the interest rates in the Euro-zone between the countries." Each country must now use everything they can to stimulate the economy again, says Claeys. And since some of them are able to do it better than others, it is true that the ECB help with cheap money.

The French Economist also sees no problems with the legal side and the ECB's mandate: "The current policy meets all of the criteria established by the ECJ in 2018." And likewise, the PEPP program is in line with the ruling from Karlsruhe. In total, the ECB and the Euro countries should do all what is possible - to work together for economic recovery.

author: Barbara Wesel (Brussels)

*The contribution of "Lagarde's Bazooka: 1,35 trillion euros for bond purchases" will be released by Deutsche Welle. Contact with the executives here.

Deutsche Welle
Date Of Update: 04 June 2020, 15:26

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