Fear of the euro crisis: The new ECB

It's high time the ECB hiked interest rates.

8.1 percent inflation and a deposit rate of minus 0.5 percent - that doesn't go together at all.

For far too long, those responsible at the central bank underestimated the development of inflation.

They had always reassured that the rise in inflation was only temporary and would soon subside again.

That turned out to be wrong.

While central banks are now raising interest rates all over the world, the ECB only announced a small rate hike for July and a slightly larger one for September.

At the same time, they are very concerned about the "fragmentation" of the euro area: the concern that if interest rates rise, the yields on government bonds in highly indebted euro countries could get out of control.

A new "anti-fragmentation instrument" is to be created for this purpose.

The ECB's new anti-crisis instrument

Although the ECB actually intends to phase out the net bond purchases at the end of June, additional bonds are apparently to be bought again if the gap between the bond yields of individual highly indebted countries and the yield on Bunds becomes much larger than the average in recent years - or if the increase is very happens quickly.

In return, other bonds from the holdings of the ECB are to be sold in order to offset the effect on monetary policy;

to "sterilize", as the central bankers say.

In fact, the ECB only intends to intervene when the rise in bond yields is “speculatively” motivated – not when it appears “fundamentally justified”.

But who wants to differentiate so precisely?

For example, is an election in a euro area that worries the financial markets part of the fundamentals or is it just speculation?

Even the ECB Governing Council seems to have different views on this.

Where is the line between the two?

During the euro crisis, there were speculative bets on the markets as to whether highly indebted countries like Greece might have to leave the euro.

This is hardly an issue at the moment.

It could be even more likely that a new divergence in bond yields would at some point be interpreted as a sign of the need for deeper political integration.

First of all, however, the main concern will be that states will suffer more from their debts as a result of the rise in interest rates.

Do not override financial market signals

High bond yields can also be a signal from the markets about the assessment of a country's creditworthiness.

Turning that off would probably not help speed up reforms.

The new instrument is also controversial from a legal point of view.

Finally, as far as is known, bonds from individual crisis countries are to be bought on a large scale if necessary.

Something similar was planned many years ago for the OMT bond purchase program.

However, this was deliberately “conditioned”, so it was linked to conditions for the claim.

As a result, it was not very popular with the crisis countries and was never used in practice.