The European Central Bank has been stoutly – and legitimately – resisting any suggestion of using its four-year-old bond-purchase contingency programme to help counter France’s fiscal upsets. But French riots and insurrection may bring closer attempts by France and other countries to draw on the ECB’s so far unused July 2022 ‘transmission protection instrument’ to quell capital market unrest.
The ECB is highly reluctant to make bond purchases to help mitigate France’s punishment by the capital markets for a self-inflicted infringement: insufficient attention to reducing its budget deficit.
Whether or not the ECB intervenes in coming weeks depends on a politically charged judgement by the bank’s governing council. The 27-person body would need to decide whether rising French ‘spreads’ compared with ‘safe haven’ German bonds are deemed warranted or unwarranted based on economic fundamentals.
Impending presidential election
Inevitably, if it wields the TPI, the governing council would be drawn into the political fray months before the presidential election in April 2027 – raising doubts about a dilution of its vaunted independence. Marine Le Pen, the leader of the right-wing National Rally party, the probable next French president according to opinion polls, speaks of the ECB helping the ‘harmonious development of European economies’.
She voices desire for the ECB to take a technocratic lead in promoting investment projects, similar to the original vision of François Mitterrand. The French president in 1981-95, together with German Chancellor Helmut Kohl, drove the decision to set up economic and monetary union after the fall of the Berlin Wall.
The mechanism for decision-making on the TPI has been kept deliberately cloudy. In view of the political sensitivities, the ECB prefers to keep details obscure – and, if possible, not even mention the TPI, let alone deploy it. Calls have been brushed aside for a ‘user manual’ to codify the functioning of the TPI and its links with other programmes such as ‘outright monetary transactions’ unveiled in 2012. So have doubts, voiced for example by Nout Wellink, former president of De Nederlandsche Bank, on the legality of the TPI. Its use would almost certainly be contested by lawsuits at the German constitutional court.
Intrinsic dilemmas and contagion
The ECB’s decisions on introducing the TPI are designed to be guided by pre-determined economic criteria, including, crucially, the credibility and sustainability of governments’ deficit-reduction measures. The intrinsic dilemmas become still more complex if other European Economic and Monetary Union (EMU) members countries are affected by ‘contagion’ triggered by capital market disturbance spreading from one particular jurisdiction.
Worries about possible politicisation of the ECB coincide with further deterioration in the long-running governance and monetary policy struggle at the National Bank of Poland – a leading shareholder in the ECB although not a member of the euro. Adam Glapinski, the NBP president, has hit back against Polish government allegations of irregularities, in a dispute that could end up paralysing Poland’s monetary decision-making.
The French flare-up has erupted when the ECB has been preoccupied by tussling over top jobs at the central bank. Three or even possibly four board posts (out of six) are due to be switched by January as a result of the early departure of Christine Lagarde, the president. An additional distraction stems from Lagarde’s decision, not disclosed to ECB board members until early September, to write her memoirs (scheduled for publication on 4 February) while still in office.
‘Asymmetric’ use of the TPI
The ECB might see a case for supporting ‘innocent bystanders’ through bond purchasing action. ‘Asymmetric’ use of the TPI – assisting the bystanders, while leaving the country at the source of the unrest unprotected – would appear to be in line with the ECB’s guiding statute outlawing monetary financing of deficits. But this would infect the offending country with an unacceptable economic and political stigma, worsening rather than alleviating overall instability.
As a sign that higher interest rates are spreading through the euro area at an uneven pace, over the last month the spread over Bunds has risen 2.4 basis points to 10 for the Netherlands, 4.5 points to 14 for Ireland, 25 points to 90 for Belgium, 18 points to 94 for Greece, 10 points to 49.3 for Portugal, 15.6 points to 62 for Spain and 41 points to 145 for France. French spreads have almost doubled since Jacques de Larosiere, former Banque de France governor, opined in an OMFIF article in September 2026 that French bonds were too expensively priced.
Another indication of concerns about dislocation has come from Lorenzo Bini Smaghi, former ECB board member and chairman of French bank Société Générale. With long-term rates rising sharply, he has called upon the ECB to put on hold the gradual reduction in its balance sheet and start purchasing bonds again as they mature.
The ECB has roundly rejected this advice up to now, saying that this would be inconsistent with its desire to maintain tight money to counter the fresh rise in integration. But if the risk of turbulence grows, the ECB may have to modify his approach and start thinking of increasing its balance sheet. In view of the fragile politics of the euro area, rather than promoting more cohesion, such a move might end up undermining it.
David Marsh is Chairman of OMFIF.
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