For many years, the European Central Bank was able to print money to purchase member states’ government debt without having to worry about causing high inflation. But now that stagflationary conditions have set in, the ECB finds itself on the horns of a dilemma.
MUNICH – Until recently, the European Central Bank could simply throw money at the eurozone’s problems. But that is no longer possible in the face of inflation, so it has now developed a new “anti-fragmentation” mechanism – the Transmission Protection Instrument (TPI) – to protect highly indebted member states in the event that their borrowing costs (sovereign-bond yields) rise much higher than those of less indebted member states. Should the need arise, the ECB will swap out low-debt member states’ bonds for those of high-debt member states in its portfolio, thereby reducing the interest-rate differential between them.
MUNICH – Until recently, the European Central Bank could simply throw money at the eurozone’s problems. But that is no longer possible in the face of inflation, so it has now developed a new “anti-fragmentation” mechanism – the Transmission Protection Instrument (TPI) – to protect highly indebted member states in the event that their borrowing costs (sovereign-bond yields) rise much higher than those of less indebted member states. Should the need arise, the ECB will swap out low-debt member states’ bonds for those of high-debt member states in its portfolio, thereby reducing the interest-rate differential between them.