(Bloomberg) -- German Finance Minister Christian Lindner’s publicly aired doubts about the legality of potential European Central Bank crisis aid for France are testing nerves in the region’s policymaking circles.
Several officials within the euro zone’s central banking community, speaking on condition of anonymity to maintain a diplomatic front, described the comments as unhelpful at a time of fragile financial markets. Two even observed that such remarks could risk making the need for emergency support a self-fulfilling prophecy.
Lindner, who said ECB intervention in the event of a dangerous selloff of the country’s bonds “would raise some economic and constitutional questions” and “test the German finance minister to see whether all this is still in line with treaty law,” hasn’t repeated that since.
In public, the most outspoken reaction so far has been from former ECB official Lorenzo Bini Smaghi, now chairman of French bank Societe Generale SA. He said Lindner’s words were “quite shocking” and noted that the European Union treaty stipulates that politicians shouldn’t pressure the central bank.
The finance minister made his remarks at an event in Munich on June 27 when asked about the prospect of ECB intervention if France’s National Assembly elections were to trigger a dangerous selloff in its bonds.
President Emmanuel Macron’s decision to call the vote prompted investors to demand the highest premium for the country’s debt since 2012. That measure of risk has since receded, and the ensuing result of a hung parliament hasn’t since unduly unsettled financial markets.
France’s bond-yield spread over Germany still remains higher than it was before the election was announced, as political gridlock raises questions about the country’s ability to rein in its budget deficit.
“The finance minister’s statement is not to be understood as an announcement,” Germany’s finance ministry said in a statement provided by a spokesperson. “He merely referred to the known facts that ECB measures may also be subject to the jurisdiction of the Federal Constitutional Court.”
Within Frankfurt and the euro zone’s central banks — the community of officials who would be called upon to activate any aid — the most common reaction among multiple officials asked on Lindner’s comments was that they won’t help just when investors are paying close attention to France and the ECB’s toolkit.
Some went further, with one saying his words were needless, undiplomatic and over the top. Such remarks could become a self-fulfilling prophecy, making the situation worse and even increase the likelihood that the ECB’s TPI crisis-fighting tool would need to be activated, two other officials said.
The finance minister should be more respectful of the central bank’s independence, some officials observed, with one speculating that the comments were probably meant to be a deterrent to attempt to stop it from using TPI.
By contrast, one official described themselves as relaxed on the matter, adding that it’s not unreasonable to question the limits of the ECB’s mandate.
A spokesperson for the ECB in Frankfurt declined to comment on Lindner’s remarks or on others’ reactions to them.
Paschal Donohoe, who chairs the euro zone group of finance ministers, offered an equivocal response on Bloomberg Television on Friday, saying that “the ECB always acts within their legal mandate,” but adding that he “understands” his German colleague’s comments.
In Paris, the political class is preoccupied with an impasse following Sunday’s election runoff. A finance ministry official speaking on condition of anonymity said that the warning didn’t spark a back-channel discussion, and pointed to the recent calming of financial markets — including Thursday’s successful bond auction — as evidence that the French economy is strong enough to reassure investors.
There is no need to talk about intervention tools, and we don’t comment on remarks made elsewhere, the official added.
Finance Minister Bruno Le Maire, in an interview last week on France 5, highlighted that the country “raised debt under good conditions” and that the spread between French and German equivalent bonds “remains stable.”
Lindner’s comments elicited muted criticism in Berlin. There was dismay from officials within the finance ministry itself, while some in Social Democrat Chancellor Olaf Scholz’s circle described the observation by his Free Democrat coalition partner as unwise.
While the ECB’s TPI tool has never been used, other measures have become the focus of litigation both at German and European Union level.
OMT, the instrument whose creation at the height of the euro zone debt crisis stemmed that turmoil, became the subject of court proceedings that saw the Bundesbank chief at the time, Jens Weidmann, testify against its legality.
Meanwhile a German constitutional court ruling in 2021 accused the European Court of Justice of overstepping its powers by backing the ECB’s quantitative easing policy.
Legal issues aside, the central bank would probably have struggled to quell prior episodes of turmoil without its crisis tools.
“In a monetary union you need to have the instruments available in order to deal with stress,” Alfred Kammer, director of the European department at the International Monetary Fund, said in an interview last week. “You want to make sure that your policy gets traction everywhere.”
For now, ECB officials are united in the view that the circumstances under which TPI could be deployed are nowhere near met at present, and its use wouldn’t be easily authorized.
They don’t see disorderly or unwarranted movements and some downplayed the recent increase in French yields, arguing it’s over-interpreted, while one said that that the country is well able to withstand higher borrowing costs for some time.
That view chimes with what the institution’s former chief economist, Peter Praet, told Bloomberg Television last week.
The veteran of the region’s sovereign debt crisis said that “below the surface, there’s a lot of worries” that the situation presents “a test of fiscal dominance.” He insisted that “the bar must be very high” to helping France.
--With assistance from Jana Randow, William Horobin, Kamil Kowalcze and Caroline Connan.
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