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The ECB should fear the next recession

Monday, Oct 23 2017
The ECB should fear the next recession

Considering the limits that govern the ECB’s government bond purchases, the central bank is quickly using most of its easing potential already now. There will be little left for the next recession, or crisis, which is problematic. The scarcity concerns the ECB is facing in its current bond purchase programmes are well-known. However, the longer-term consequences of such scarcities have not been discussed in detail. As the ECB is using most of its ammunition now and will not be able to reload quickly, there will be little capacity left to tackle the next recession – or debt crisis.

The ECB is expected to prolong its bond purchase programmes by 6-12 months at the October meeting, cutting monthly net purchases from EUR 60bn to around 30bn. This is close to the maximum it can do without hitting its self-imposed limits on the programme. The ECB has reviewed the limits several times, and every time the 33% issuer limit – the ECB can own a maximum of 33% of a country’s eligible debt – has been strengthened. Especially now that the German constitutional court has taken a critical stance on the purchases, the limit appears to be set in stone.

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