How to frame the upcoming decisions facing the ECB?

In 2020, the ECB is going to fully monetise the additional fiscal deficits caused by the coronavirus crisis. But will it be able to continue to do this in 2021? This raises a string of questions. Is the ruling of the German Federal Constitutional Court a problem? In substance, the court’s judges are right: the ECB is no longer independent (it is practising fiscal dominance), it is monetising public debt and is no longer respecting its mandate. But the ECB has clearly said that as a European institution, it does not come under the jurisdiction of a German court. So this ruling will have no effect in practice. The ECB frequently points out that it has to ensure the smooth transmission of monetary policy to the euro-zone economies. This means that it has to control the peripheral countries’ yield spreads (a widening of spreads leads to restrictive monetary conditions in the countries concerned even though monetary policy is expansionary). This argument justifies the policy to stabilise spreads. There is a risk of a return to higher inflation in 2021 due to wage increases and rising production costs brought about by the new health regulations. If inflation does rise, the ECB will be in difficulty (it will no longer be able to say that public debt monetisation will lift inflation up towards the target), unless it can argue that it is not actually inflation at play but a one-off increase in the price level due to the new health regulations. The mutualisation of the euro-zone countries’ fiscal deficit financing thanks to issuance by the EIB, the ESM and the EU (EUR 540 billion in 2020, potentially EUR 500 billion in 2021) is important politically. As long as the ECB is monetising all fiscal deficits, mutualisation has no financial or economic purpose. It would become indispensable if higher inflation forced the ECB to reduce its government bond purchases. The ECB and euro-zone governments are already implementing helicopter money by converting government bonds into perpetuals ; the ECB is buying public sector and corporate bonds (even low-rated ones) and is financing banks at a negative interest rate. What is the ECB not doing? Currency interventions (this is not permitted for OECD countries); share purchases (which could make sense given the objective of ensuring smooth monetary policy transmission).