In summer 2012, the ECB announced its intention to introduce interest rate ceilings (ceiling rates, [interest] caps) for the government bonds of stumbling EMU members. In this case, the ECB will buy securities on the market whenever their prices fall below a certain threshold or their interest rates exceed a certain limit. – The ECB’s policy of setting upper limits for interest rates on government bonds, above which it intervenes, has a number of easily recognizable serious negative consequences. — Sovereigns are thus insulated from the sanctioning effect of the capital market, which is tantamount to inviting lax fiscal policy: the will to reform is paralyzed and investors turn away from the euro area altogether.– Investors are hedged against price losses, which distorts investment behavior in favor of government bonds and at the expense of other securities. — Monetary policy loses its independence vis-à-vis fiscal policy. — Purchases of government bonds by the ECB basically have a distribution effect within the EMU member countries and are not part of a rule-based monetary policy per se. — The ECB cannot include government bonds at risk of default in its portfolio without limitation; ultimately, the members with prudent and sound budgetary policies are liable for the risks, and this increases public disenchantment with Europe (“not that Europe!”) with far-reaching long-term consequences. — Last but not least, the EU Treaty (Article 125 TFEU) explicitly contains a non-bail-out clause: the Community is not liable for the debts of any public entities in the member states. The government bond interest rate cap clearly violates this agreement. – See presumption, central banking, buyouts, central banking, bail-out, internal flexibility, blame game, deficit financing ban, European Stabilization Mechanism, one-vote principle, EMU bust, ECB sin-bin, exit, peer pressure, kindergarten argument, neuro, policy clamp, rescue, bailout, shadow state, debt club, seven percent limit, solidarity, financial, Stability and Growth Pact, stabilization mechanism, European, southern front, redistribution, central-bank-induced, debt-productivity-linkage, contract compliance, interest rate smoothing. – Cf. Monthly Report of the Deutsche Bundesbank of October 2012, p. 19 f. (any kind of financial assistance only provides breathing space, which must be used for reform measures).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/