ECB Insight: No Panic at the Eurotower, But Not Much Else Yet, Either

15 June 2022

By David Barwick – FRANKFURT (Econostream) – The statement from the European Central Bank after Wednesday’s ad hoc meeting of the Governing Council suggests an enduring reluctance on the part of monetary authorities to tackle the creation of a new anti-fragmentation instrument.

Although Council members confirmed ‘lasting vulnerabilities in the euro area economy which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions’, the ECB’s reaction did not denote any great sense of urgency.

Perhaps, to give the ECB the benefit of the doubt, an overriding goal was simply to avoid any appearance of panic. As we wrote here earlier today, the hesitancy about establishing a permanent new tool ‘is due at least in part to concerns that the endeavour itself will signal to financial markets a certain fear policymakers would prefer not to reveal’.

Today’s communication certainly didn’t run much risk of making the ECB seem unduly worried, sounding as it did almost by the by, and hardly in proportion to the irregularity of an ‘ad hoc’ meeting of the Council, something normally reserved for situations of a certain seriousness.

Indeed, on some counts the statement may even have erred in the direction of nonchalance. The decision to apply flexibility to PEPP reinvestments does little to counter this impression, being among the lowest of the low-hanging fruit for the ECB to pick.

‘In addition, the Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council’, the statement added.

Were the relevant committees already working on something or not? The term ‘accelerate’ is generally meant to imply the continuation at a higher rate of speed of an already started process, but the ECB has stressed often enough that it is able to launch major programmes with singular alacrity.

And in this case, why the need to ‘accelerate’, rather than simply finish? A cynical observer might wonder whether the latest bout of market volatility was in fact only the starting signal for an effort that will now be frantic.

Moreover, given everyone understands that it is incumbent on the Governing Council to formally decide to implement a new instrument, why does the ECB need to point out that whatever the committees devise will then be duly submitted for the Council’s ‘consideration’, as if this were a whole new, time-consuming phase in a drawn-out process?

Does the statement ultimately mask an inability to reach agreement on something today?

It may be that the ECB is in effect playing a game of chicken with financial markets, and will have something to unveil to silence all doubters at July’s Council meeting at the latest. But it seems clear that the ECB’s abiding preference, which rang through again today, is for the problem to magically disappear without the need for an expansion of the toolbox.