The European Central Bank is executing a risky U-turn

There are few occasions on which a central bank’s meeting represents a critical turning point with the potential to have serious economic consequences. Thursday’s European Central Bank meeting may prove to be one such occasion. Forced by high inflation to announce the imminent end of its aggressive government bond buying program, the ECB has all too likely paved the way for another round of European sovereign debt crises.

The ECB engaged in a large-scale bond-buying program over the past two years in response to the Covid pandemic, as did the U.S. Federal Reserve. The size of the ECB’s balance sheet increased by a staggering four trillion euros (equivalent to $4.4 billion), including €1.85 trillion under its Pandemic Emergency Purchasing Program. Under that program, the ECB no longer felt bound make individual government bond purchases in relation to their ECB capital contribution. Instead, it used its discretion in deciding which countries to support most with its bond buying.

The ECB’s massive bond buying activity has been successful in keeping countries in the eurozone’s periphery afloat despite the marked deterioration in their public finances in the wake of the pandemic.

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