Bundesbank President Joachim Nagel skeptical of using technical means to contain borrowing costs in weaker member

To protect the interests of the EU as a whole, Bundesbank President Joachim Nagel was skeptical of using technical means to contain borrowing costs in weaker member nations.

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Bundesbank President Joachim Nagel warned that the European Central Bank should be careful about using tools to contain the borrowing costs of weaker nations.

In his first statement on the matter since the ECB's decision to speed up work on a crisis instrument, the German policy maker said that officials should use such measures only in "exceptional circumstances and under narrowly defined conditions."

He also observed that it is "extremely difficult" to determine whether a spread between euro-area members is justified.

"I would thus advise against using monetary-policy instruments to limit risk premiums," he said in a virtual speech to an event in Frankfurt. "One can easily find oneself in trouble."

The spread between Italy's 10-year bond yield and Germany's, a key indicator of risk in the region, was still 191 basis points after Finance Minister Nagel’s comments. The spread had fallen to a seven-week low on Friday following his remarks.


With the ECB's first rate hike approaching, investors are questioning whether surging borrowing costs could force weaker nations into a repeat of last decade's Europe's sovereign-debt crisis. After Italian bond yields soared to a multi-year high in June, officials pledged to develop a tool to stem turmoil.

The comments by ECB Governing Council member Nagel are the most critical so far. He warned that central banks "must not be driven by what are often very short-lived developments in the financial markets," and that any instrument would need to be "clearly defined."

The following paragraph summarizes the comments of the CEO about a potential tool for monitoring and analyzing data:

  • Interest-rate spreads are an indicator of financial market excesses.
  • In some countries, the transmission mechanism is faulty
  • The ECB's ability to keep prices stable in the euro area is hampered by the limitations of these effects

Nagel also pointed out that any use of a tool should be "only temporary." He noted that the Outright Monetary Transactions program - introduced by former ECB President Mario Draghi - could be used in principle if needed.

If a new measuring device were needed, Nagel suggests that three conditions should be met:

  • The government should not be swayed by the protestors' demands, and if necessary, it should counteract the effects of its actions
  • The policy of zeroing out the currency should be justified solely on monetary grounds, should be proportionate, and there must be sufficient guarantees to prevent governments from being financed
  • In order for countries to be motivated to conduct fiscal and economic policies in a sustainable manner, they must have incentives; effective fiscal conditionality is "essential"

At the ECB's annual retreat in Sintra, Portugal, last week, many officials including President Christine Lagarde advocated for the introduction of a tool that would help curb inflation. Some, like Latvia's Martins Kazaks, stressed that any instrument should be used as a last resort when it's urgently needed.

In his latest article, Nagel warned that the ECB's inflation outlook "may" have to be revised upwards again at its next forecast round in September, and that "a larger interest rate hike would be entirely appropriate" if there is no improvement.

"We must focus on fighting this high rate of inflation," he declared.

At the same conference, ECB Vice President Luis de Guindos echoed this concern. The central bank's commitment on crisis-fighting should "not interfere with," but rather "enable," a greater focus on the monetary policy stance, he said.