ECB: Political strains test policy shield – Rabobank

RaboResearch notes that the ECB’s Transmission Protection Instrument provides a backstop for Eurozone government bonds during stress not justified by fundamentals. However, the report questions how robust this framework would be if simultaneous political turmoil hit major Eurozone economies, suggesting markets may need to reassess assumptions about Eurozone cohesion and the effectiveness of ECB interventions.

ECB backstop faces political stress test

"Germany, France, Italy, and Spain account for 60% of Eurozone GDP. Yes, there is a technocratic rules-based EU superstructure, and the ECB’s Transmission Protection Instrument that allows it to buy Eurozone government bonds during periods of market stress or disorderly conditions not justified by country-specific fundamentals. (Just imagine if the Fed under Warsh were to consider putting that kind of monetary policy in place in the current market environment: quelle horreur!) However, how comfortably could that trundle on if we were to see conflated trouble in the Big Four Eurozone political economies? But this isn’t a ‘European’ issue any more than it is a ‘US’ one."

"That’s as French far-left presidential candidate Melenchon, who wants more public spending, declared: “The ECB holds an enormous amount of French state debt. I propose to all the states of the eurozone to cancel this debt held by the ECB”. He added,“We are all members of the euro system, so this is a debt we owe to ourselves. The media establishment has tried to manipulate this reasonable proposal. It took us a few days of explanation to untangle their lies. That is now done. From now on, a poll shows that the French who support this proposal to cancel the debt are more numerous than those who oppose it.“ That’s on top of, “We will establish a public banking hub. Our country has a lot of money.”

"However, nationalist Le Pen is the election favourite. She promises a "golden rule" to keep fiscal deficits under 3% of GDP and a cost-cutting package - which includes €125bn from migration, “useless” public agencies, and France’s EU contribution; plus, she wants to roll back Macron’s pension reform so workers can retire at 62. Le Pen also favours a strategic rapprochement with Moscow, once the war is over, opposes economic sanctions, and aims to limit aid to Kyiv."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)