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ECB seeks policy response to dual challenge

Good morning and welcome to Europe Express.

Among the last policy announcements expected before the Easter break is the outcome of the European Central Bank’s governing council meeting today, which may shed further light on how the Frankfurt-based bank seeks to reconcile apparently clashing priorities. We’ll explore the conundrum of helping countries borrow at affordable rates while also keeping the lid on inflation.

With Finland inching ever-closer to Nato (and Sweden, too, although at a slightly slower pace), we’ll look at what security guarantees can be offered to the two countries in the months between applying and actually becoming members of the military alliance.

As the horrors of uncovering more mass graves around Kyiv are still unfolding and western allies are beefing up their arms supplies to Ukraine, we’ll bring you up to speed with the latest consequences for Russia after its invasion: Europe’s space agency is stopping joint projects with its Russian counterpart when it comes to lunar missions.

We’ll be off for a few days — hopefully, quiet ones — but we’ll return in your inbox on Wednesday April 20.

Competing policies

Could the European Central Bank continue bond purchases even after it starts raising interest rates? That is likely to be one of the questions Christine Lagarde is asked when the president of the ECB unveils its latest monetary policy decision today, writes Martin Arnold in Frankfurt.

It would seem contradictory for a central bank to keep printing money to buy bonds when it is also making money more expensive by raising rates — as it is expected to do later this year.

Coming at a time when eurozone inflation has soared to its highest level in the history of Europe’s single currency, hitting 7.5 per cent last month, this idea is likely to prove particularly controversial.

Yet it is very much on the cards. Both Lagarde and Philip Lane, the ECB’s chief economist, have said recently that the bank could introduce a “new instrument” to support countries facing a sharp increase in borrowing costs as rates rise.

Staff are already working on such a “crisis tool” to make targeted purchases of sovereign or corporate bonds to tackle any unwarranted sell-off in the bonds of a particular country or group of countries.

The model is a slimmed-down version of the ECB’s pandemic emergency purchase programme (PEPP), which gave it great power to calm anxiety in bond markets by buying large quantities of assets without the usual limits on those purchases.

The PEPP stopped net purchases at the end of March, some €132bn short of its total €1.85tn envelope. But a similar tool could come in handy for the ECB, which has not raised interest rates for over a decade, so worries over what might happen in financial markets once it starts to raise borrowing costs.

Eurozone sovereign bond markets have already sold off since the start of this year, anticipating that soaring inflation will force the ECB to stop buying bonds and start raising rates soon.

Germany’s 10-year bond yield, a benchmark for Europe’s debt markets, has surged out of negative territory at the start of this year to rise over 0.75 per cent.

The difference, or spread, between German and Italian 10-year borrowing costs has increased only slightly, rising from about 1.3 percentage points to 1.6 percentage points since the start of the year. But who knows what the fallout from Russia’s invasion of Ukraine could do to the growth prospects and debt and budget deficits of countries such as Italy.

For the ECB, the danger is that such a backstop facility could trigger accusations that it is straying too close to “monetary financing” of governments, which is against the EU treaty.

“Redenomination risks have all but disappeared, inflation is at record highs, and core bonds yields are rising,” said Frederik Ducrozet, a strategist at Pictet Wealth Management. “The justification for another quantitative easing programme will be much more difficult to articulate.”

Lagarde will have to tread carefully to avoid antagonising the ECB’s German critics who in the past have been quick to bring repeated legal challenges against its bond-buying activities via the country’s constitutional court.

Chart du jour: Recession fears

Read more here about why the German arguments that a full EU embargo on Russian energy would trigger a recession may be gaining traction, after a forecast released yesterday was more pessimistic than earlier economic studies.

Finnish vulnerability

Officially, a report by Finland’s government published yesterday on the options for the country’s future security arrangements does not make any specific recommendations. But only the tone deaf would have missed the mood music in Helsinki: an application for Nato membership is fast approaching, writes Henry Foy in Brussels.

But, as Finnish and Nato officials admit, making the seismic decision to abandon generations of non-alignment and join the US-led military alliance may, ironically, make Finland less safe — at least in the short term.

The snag lies in Nato’s admission procedures. First, a country must declare a willingness to join. Second, it must set out a timeline to meet the alliance’s membership standards. And then each current member must agree and ratify the newcomer’s place in the club.

Finland will waltz through the first two stages, given its modern military, impeccable democratic standards and years of partnership with Nato on exercises and training. But getting 30 governments and parliaments to ratify legislation could take as long as a year, Finnish officials have admitted.

Finland shares the largest border with Russia in the EU and knows through bitter, bloody experience the pain of conflict with Moscow. It has successfully avoided such for almost 80 years because of a policy of neutrality: firmly in the western camp but short of signing up to what is still a Washington-run defence pact.

So the challenge for Helsinki and its would-be allies is to strike some form of arrangement whereby Finland is protected for the time it takes from application to formal entry, when Nato’s mutual defence pact, Article 5, will kick in.

Finnish officials yesterday stressed that there were no security guarantees in place. When asked by Europe Express about comments by Jens Stoltenberg, Nato secretary-general, that the alliance was working out ways to “address these [interim] concerns”, Antti Kaikkonen, defence minister, said he had “been debating the possible process with many Nato countries . . . but there’s not much that I can [be open about]”.

Of course on paper Finland already has 26 countries sworn to defend it: article 42.7 of the EU’s Lisbon treaty obliges all bloc members to come to its aid should Russia, or any other country, attack.

But the reason Finland is even contemplating Nato membership in light of Moscow’s invasion of Ukraine appears to speak to the perceived reliability of that pledge.

“We understand that . . . you cannot be a little bit in Nato,” said Pekka Haavisto, Finland’s foreign minister, with more than just a hint of pathos. “You either are in Nato or are not in Nato.”

No to Russia’s moon missions

The European Space Agency has ended its co-operation with Russia on three unmanned moon missions, in response to that country’s “aggression against Ukraine”, writes Clive Cookson in London.

ESA said yesterday that it would withdraw equipment and instruments from the Russian Luna-25, Luna-26 and Luna-27 missions that were planned over the next few years. But it has already made alternative arrangements for some of them.

A European experimental navigation camera was due to fly on the Luna-25 lander later this year. Josef Aschbacher, ESA director-general, said he had asked his counterpart at Roscosmos, the Russian space agency, to remove the instrument from the craft and store it safely until it can be retrieved. Instead, the camera will travel to the moon on Nasa’s Peregrine lander.

Aschbacher said ESA was arranging for its contributions to later Luna missions, including a lunar drill and chemical analyser, to be carried on American and Japanese landers.

ESA and Russia had already ended their partnership on the ExoMars Rover mission but they continue to work with Nasa on joint operations at the International Space Station.

Europe had been worried that war in Ukraine would cause production problems for its Vega launchers, whose upper stage includes the Avum rocket engine made by Yuzhmash in Dnipro. But Daniel Neuenschwander, ESA’s director of space transportation, said: “We now have sufficient engines for all Vega launches planned in 2022 and 2023. This is extremely positive news.”

What to watch today

  1. European Central Bank governing council meets in Frankfurt

  2. Kadri Simson, energy commissioner, meets Mark Gitenstein, US ambassador to the EU

Notable, Quotable

  • Genocide debacle: Emmanuel Macron, France’s president, has declined to endorse the accusation by his US counterpart Joe Biden that Vladimir Putin of Russia was guilty of “genocide” in Ukraine. His caution echoes that of other European leaders who have instead called for a full investigation of potential war crimes by Moscow.

  • Fear of FSB: Germany’s foreign intelligence service last year shunned an offer to meet former Wirecard executive Jan Marsalek in Moscow, fearing that the invitation to talk to the fugitive was a trap set up by Russia’s FSB spy agency, people familiar with the matter told the Financial Times.

  • Protected products: Brussels is widening the number of European goods with protected status, from food and drink — including the likes of parmesan cheese and Parma ham — to products such as Donegal tweed, Solingen cutlery and Delft ceramics. The new rules would mean only producers in specific regions using agreed processes could sell goods across the EU by the protected name, to avoid cheap competition.

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