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ECB meddling only exacerbates moral hazard

Frankfurt am Main, Germany -May 13th 2019. .European Central Ban

A new ECB crisis programme would be another grave mistake

Just as it looked like there was a route out of central bank market manipulation, the prospect of another crisis programme from the European Central Bank is gaining traction. This is the latest example of a central bank wildly overreaching.

There is growing market expectation of a new facility from the ECB, to be used in a crisis to contain spreads as the bank tries to normalise its monetary policy by raising rates and embarking on quantitative tightening.

The central bank has declined to comment so far, but the market is expecting something that will be used as and when, rather than more and regular bond buying.

The hope is for ECB president Christine Lagarde’s own Draghi moment, after her predecessor's famous declaration during the eurozone crisis in 2012 that the central bank would do “whatever it takes” to save the single currency, leading to the creation of its Outright Monetary Transactions (OMT) scheme — to date untouched.

Many in the market hope that a new programme will never have to be used either. Instead, it will be something akin to a nuclear deterrent — except one aimed at short sellers of eurozone sovereign debt.

Addicted to overreach

Once again, the ECB is overstepping its role as the moderator of inflation. Central bank bond buying, whether on an ad hoc basis or through a programme, works to homogenise market risk.

The difference between German and Greek debt becomes artificially small, despite the obvious and clear fundamental differences between the two credits. The fundamentals of capitalism take a back seat to a central bank board, unelected by the public, effectively deciding how much a sovereign’s debt should cost.

The new programme will likely not step in if spreads widen as the result of national domestic policy choices, but where does that line of thinking end?

Europe is suffering soaring gas prices because of its reliance on Russian gas. This is an external shock, but if Germany had not so aggressively dismissed nuclear power, a domestic issue, it might not be in this quandary. So, does Germany deserve support from a new programme or not? And, more importantly, is it ethical, or even sensible, to leave these decisions down to Lagarde and her board?

And what does this say about the relationship between eurozone politics and monetary policy, other than to confirm that they are inextricably linked? The ECB’s never-ending push to stop spreads from catching up to reality means that political and financial stability are becoming one and the same in Europe. A sobering thought, considering how often financial crashes occur.

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