ECB issues guidance on transmission protection instrument

The ECB has issued a press release on the Transmission Protection Instrument (TPI). Read it here.

Strong points:

  • Can be activated to counter unwarranted and disorderly market dynamics that pose a serious threat to the transmission of monetary policy in the euro area
  • Will buy “in jurisdictions experiencing deterioration in financing conditions not justified by country-specific fundamentals”
  • Will buy securities with maturities of 1 to 10 years
  • The Governing Council’s decision to activate the TPI will be based on a comprehensive assessment of market and transmission indicators
  • The purchases would be terminated either in the event of a sustained improvement in transmission or based on an assessment that the continuing tensions are due to the fundamentals of the country.
  • Compliance

What he says about the four criteria:

  1. compliance with the EU budgetary framework: not be subject to an excessive deficit procedure
  2. absence of serious macroeconomic imbalances
  3. fiscal sustainability
  4. sound and sustainable macroeconomic policies

This places far too much judgment and power in the hands of the Board of Governors. And if they judged the Italian debt unsustainable? Additionally, there is a circular logic at play as it is not unsustainable as long as the ECB continues to push yields lower.

However, the real asset lies in “sound and sustainable macroeconomic policies”. This part adds:

comply with the commitments submitted in the recovery and resilience plans of the Recovery and Resilience Facility and the country-specific recommendations of the European Commission in the budgetary area within the framework of the European Semester

It’s vague, but it takes policy-making away from elected governments and puts it in the hands of the ECB and the European Commission.

It’s a slippery slope. I mean, how long will it be before climate goals are one of the criteria? This is already implicit in the commitments submitted in the Recovery and Resilience Plans for the Recovery and Resilience Facility.

What if a eurozone country becomes too close to Russia?

It won’t be long before the Board of Governors sits and decides whether a country defaults or not.


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