FRANKFURT (Reuters) – A surge in market pressure on France due to concern over its budget deficit has been “limited” and part of the normal functioning of euro zone bond markets, the European Central Bank’s chief economist Philip Lane said on Wednesday.
A series of political crises this year has rattled investors in French government bonds and brought the country’s budget problems to the fore, with the premium that buyers demand to own French bonds rising to the highest level since a debt crisis 12 years ago.
While the ECB has tools at its disposal to put out any fire in the debt market, Lane seemed to downplay any chance of imminent action to cap the spread between French bond yields and their German counterpart.
“What you talk about there, in the end, has been fairly limited,” Lane told an event hosted by Market News International.
“(It has been) noticeable, trackable, but it’s basically part of the design of the euro area that spreads are supposed to respond to evolving beliefs about future fiscal fundamentals.”
The ECB can deploy its Transmission Protection Instrument to buy any amount of a country’s bonds if it finds that there is a unwarranted and disorderly widening in spreads.
New French Prime Minister Francois Bayrou said upon his appointment last week that he faced a “Himalaya” of a challenge to tackle France’s deficit, which he said was a moral and not just financial question.
Many of the euro zone’s 20 governments – as well as the United States — have been running oversized deficits since the pandemic and spending is expected to continue in the coming years, albeit at a lower pace, to support rearmament and the transition to a greener and more digital economy.
Speaking about a growing clamour for central banks to support this spending, ECB policymaker Pierre Wunsch said on Wednesday governments should not expect “money falling from the sky”.
“We’re not going to make up for what’s difficult on the political front,” Wunsch, the Belgian central bank governor, told the Reuters Global Market Forum.
“We need to give democracy a chance and not try to find a solution with money falling from the sky. It ends badly.”