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STANFORD – The European Central Bank’s monetary policy has undergone a peculiar change during the pandemic. Something other than the goal of price stability appears to be guiding the bank’s overall approach, suggesting that it has adopted a new mandate without publicly announcing it.
Since the start of the COVID-19 crisis, the ECB has succeeded in closing the gap between northern and southern member states’ borrowing costs, bringing eurozone North-South yield spreads to historic lows. And with Europe facing multiple threats to its unity – from Donald Trump’s administration and Vladimir Putin’s revanchist Kremlin to an increasingly assertive China and homegrown populists – policymakers have effectively adopted “spread narrowing” as a new mandate.
ECB President Christine Lagarde and her colleagues seem to recognize that ensuring European unity and solidarity is the most important objective an institution like the ECB can pursue at this critical moment. Though no one at the bank is likely to admit it, there is little question that they are now in the business of holding down spreads.
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