Deviations from Capital Keys Continue at the ECB
This week the ECB made public its ECB QE June data – QE stands for Quantitative Easing. The data is of particular importance due to the recent confrontation between the central bank and the German constitutional court.
The later, ruling that the ECB did not respect proportionality in its APP program (i.e., bond-buying program), threatened the very independence of the central bank, at a time when the focus should be on measures to help the Euro area economies.
The June data was not short of big surprises. For instance, France and Italy were repurchased by about €40 billion, while Germany, once again, under purchased by about €13 billion.
Understanding the ECB Bond-Buying Program
Quantitative easing is a form of reducing the national debt, albeit in an artificial way. By buying the bonds issued by national governments, the ECB may address imbalances in the economic recovery in various states. More importantly, it can alleviate the impact of exogenous shocks like the coronavirus health crisis.
By buying more bonds in one part of the Euro area and less in other, the ECB distributes capital where it is needed the most. At the same time, states are encouraged to increase their fiscal stimulus, but not all of them can do so with the same fire-power – Germany and other Nordic states have more in their pockets to use than the Southern states like Italy, Spain, Greece or Portugal.
This raises the question of fairness and brings into discussion the large economic discrepancies between the North and South regions in the Euro Area. However, such discrepancies are seen everywhere, in every country in the world there are some regions that earn more than others.
Only that, in its relatively short history, the European Union faces one crisis after another with an incomplete legislative agenda.
One of the main consequences of the ECB bond-buying was that it stabilized volatility on government bonds. As the ECB’s bond holding increases, the volatility declines.
Moving forward, investors interested in the European space will focus on the shape that the EU recovery fund will take. Negotiations are still in their incipient phase, and the proportion of grants vs. loans is the one that makes a difference for investors.
If Europe sends a message of unity, small deviations from capital keys from the ECB, like the ones we have seen in June, will not bother anyone else in the future.