Euro monetary policy: Bundesbank boss: Support new ECB

Bundesbank President Joachim Nagel intends to make his approval of the European Central Bank's (ECB) new instrument to combat unwanted yield swings dependent on the terms of the instrument.

"As central banks, we must not expose ourselves to the risk of fiscal dominance," said Nagel on Monday at an event at the Goethe University in Frankfurt.

The impression should not be given that central banks are preventing fiscal policy from initiating budget consolidation.

"I said that I would not rule out such an instrument in general, but that I would make my approval dependent on this conditionality if it were to be the case," said Nagel.

The Bundesbank President said that the conditionality had to be clearly designed in such a way that it was justifiable.

There must also be a corresponding proportionality in how such an instrument is used.

"The discussion will have to be held, and I will take an active part in it." The design of the program should be based on experience with the OMT program of the ECB.

However, the mandate of the central bank is clearly price stability.

“The focus should now be on that and the other topic, if it is solved properly, then I can also be a supporter there.” But he must first know the solution before he positions himself on it.

The yields on government bonds in many euro countries had risen sharply as a result of the ECB's expected interest rate turnaround.

The yields of highly indebted member countries of the monetary union increased particularly significantly, which means higher financing costs for them.

The Governing Council of the ECB even came together in June for a special meeting that had been scheduled at short notice.

There, the monetary watchdogs decided, among other things, to quickly complete the development of a new instrument.

With this, the ECB wants to take action against an unwanted widening of the bond yield differences (spreads), which they usually refer to as “fragmentation”.

With the so-called OMT program, the ECB already has an instrument with which unlimited government bonds can be purchased from individual euro countries that have come under pressure.

However, in order to be included in the program, the affected euro countries must apply for a European aid program.

However, many states want to avoid this.