Putting the Pep in PEPP
For now, the European Central Bank’s new €750 billion Pandemic Emergency Purchase Program is the only game in town for ensuring that the eurozone survives the COVID-19 crisis intact. The ECB should strengthen its bazooka to prevent the pandemic from causing even more damage.
LONDON – The European Central Bank’s €750 billion ($818 billion) Pandemic Emergency Purchase Program (PEPP) was hailed at its inception in March as the “big bazooka,” bringing welcome relief to bond markets in so-called peripheral eurozone countries such as Italy, Spain, Portugal, and Greece. But the ECB must strengthen the program to make it truly effective.
The ECB’s PEPP purchases are unlike its regular, across-the-board asset purchases, which seek to provide general monetary stimulus. Whereas those operations are based on each country’s share of the ECB’s capital (or “capital key”), PEPP’s purpose is to fix a market malfunction by targeting purchases at countries under the greatest pressure.
The new program, which investors expect the ECB to enlarge, has succeeded in capping interest-rate spreads between core and peripheral eurozone member states. But spreads remain elevated and investors are jittery, especially given the likelihood that the COVID-19 crisis will increase Italy’s public debt to 150-160% of GDP for the foreseeable future. There is no good way to finesse that shock.