In Europe, caught up in a financial shock, a familiar drama is unfolding.
At a closed-door meeting Thursday local time, German Finance Minister Christian Lindner and the ECB clashed and sparred over current euro-zone bond market risks, according to media reports.
Mr Lindner said there was no particular risk in current market conditions, that he was not worried about recent moves in eurozone bond yield spreads and that talk of fragmentation in eurozone financial markets could damage confidence.
This scene is reminiscent of the European debt crisis that started from Greece more than 10 years ago. At that time, Germany also showed many differences on the resolution of the debt crisis, and Germany’s reluctance to lend a helping hand is also believed to have contributed to the outbreak of the crisis.
Mr. Lindner: Spreads at levels that don’t worry about rushing into meetings only add to nervousness
The Federal Reserve has already raised its bazooka in the face of high inflation, raising interest rates this week by the most in nearly 30 years, while the European Central Bank, already far behind in tightening, sent shockwaves through European bond markets last week when it officially announced it would do so.
Spreads on 10-year Italian and German government bonds widened sharply as investors dumped government bonds of peripheral countries such as southern Europe, particularly debt-laden Italy, pushing a barometer of eurozone financial stress close to the 250 basis point “danger zone” threshold.
In response to rising financial divergence, the ECB held an unscheduled emergency meeting on Wednesday and pledged to speed up the development of an “anti-financial divergence instrument”.
Lindner was critical of the ECB’s move.At Thursday’s meeting, Lindner said the ECB’s hastily convened meeting could add to market jitters:
The eurozone is stable and strong, and there is no fear of fragmentation.Although spreads among some members are rising, current levels suggest no cause for concern.
Mr Lindner again emphasised the importance of tackling inflation, saying “our task is to show that we will return to sustainable public finances and leave behind expansionary fiscal policies during the pandemic”.
Germany, the euro zone’s largest economy, has been a champion of austerity in the bloc, and Lindner has repeatedly urged the European Central Bank this year to raise interest rates to curb inflation, as well as calling for greater fiscal discipline and spending controls in the EU.
The ECB is in an awkward dilemma
The irony is that the ECB, which has been keeping monetary policy loose in recent years and is finally ending eight years of negative interest rates, must first embrace liquidity and provide more liquidity to weaker eurozone countries before it can truly enter the “age of austerity”.
The ECB fears that a rush to tighten policy and a bond-market panic could push up borrowing costs for weaker countries, plunging them into financial crisis.
European Central Bank President Christine Lagarde defended the bank’s handling of the situation at Thursday’s meeting, telling finance ministers that “we have to address the risk of fragmentation in order for monetary policy to be able to operate across the euro area.”
Ms. Lagarde reiterated that the ECB would use new crisis-fighting tools if weaker countries’ borrowing costs rose too high or too fast.The ECB could be triggered to use new tools if bond spreads widened beyond a certain threshold or if markets moved at a certain speed.
But again, no details were given.The ECB’s facility is now expected to involve targeted purchases of the bonds of euro zone countries and could be unveiled at the ECB meeting on July 21.
And with Germany raising objections and divisions within the euro zone over whether to help peripheral countries such as southern Europe, any decision by the ECB will face resistance.