ECB halts PEPP reinvestment, reigniting euro debate

Euro and risk premiums back at the center of debate

European risk premiums and the euro are back in the spotlight at the worst possible time: just as household and corporate debt levels have been falling for years. The paradox runs through the entire issue. During a decade of escalating debt, the indicator remained nearly frozen; now that some charts show deleveraging, alarms are being raised. Something doesn't add up in the official narrative.

The most circulated explanation points to the European Central Bank (ECB). The institution had supported Southern European debt by buying bonds aggressively, and that program is entering its final phase. Others point to underlying causes: continuous money printing, loss of European competitiveness, and the electoral rise of parties seeking to cut Brussels' powers. None of this is minor for a currency that is more than just money—it's a political project.

ECB turns off the tap: €5.4 billion less in purchases

The ECB had kept Southern countries' public debt afloat through relentless bond buying. That support is ending. The Governing Council will continue to fully reinvest principal from maturing Pandemic Emergency Purchase Programme (PEPP) assets until the end of June 2024, but after that, the program changes phase. The figure hovering over the analysis is stark: the central bank will stop buying Spanish debt worth €5.4 billion.

And starting January 1, the question is no longer rhetorical: who buys it then? The risk premium measures exactly that extra cost demanded by the market for lending to a country compared to German bunds. If the buyer of last resort steps back, others set the price, not always with the same patience.

There is a tool designed for such situations, the Transmission Protection Instrument (TPI), which allows intervention in the secondary debt market to prevent spreads from threatening effective monetary policy transmission. On paper, it exists. In practice, tools are activated when convenient, not when needed.

Germany in recession and doubts about the euro

Germany has accumulated two quarters in recession and unemployment has risen for two years. It is the partner that held up the building, now showing cracks. With Europe's largest economy struggling, the euro loses one of its pillars, and comparisons with the dollar become uncomfortable again. This isn't unprecedented: between 2002 and 2006, the single currency traded significantly weaker than the greenback. The difference is the context.

The euro doesn't depend solely on interest rates. If parties wanting to return powers to national capitals keep growing, the European project comes into question, and so does its currency. This is the point nobody wants to put in writing in a report: the currency can withstand a recession, but political fragmentation is another matter.

Money printer, rates, and devaluation

Lowering rates increases liquidity; more euros in circulation miccionan higher inflation and a currency worth less against others. It's macroeconomics 101, though it surprises some. The sequence of devaluation-inflation-loss of purchasing power worries those who look at data, not headlines.

Across the Atlantic, with rates above 5%, the United States spends more paying its debt than on its defense budget. The country that prints the reserve currency has margin; others have much less. In Spain, some claim online that credit card interest exceeds 20% and that nine out of ten mortgages are variable-rate, meaning any movement in the Euribor translates directly into monthly payments.

Underlying this are two opposing narratives. One argues that money printing is the cause and adjustment is inevitable. The other counters that policy is a consequence of the economy, not vice versa, and economic power decides what gets printed and for whom.

Political or economic risk premium?

When the premium spikes the day after an election result, the temptation to blame voters is immediate. But markets react to the same old things: who will govern and with what mandate. In France, the rise of the far-right and the president's calculated moves to strengthen his position for 2027 tighten the rope. In Argentina, the Buenos Aires Stock Exchange rose more than 22% after Milei's victory, proving markets aren't scared by labels, but by expectations of each program.

The coldest reading suggests the premium is a thermometer. The cynic claims it's a weapon waved when a specific government needs to be nervous. Both can be true simultaneously, and the outcome remains open.

The doubt remains that no chart resolves: if the ECB stops buying, Germany enters recession, and the political map fragments, what exactly supports the euro?