Political turbulence brewing across the eurozone's four largest economies could put a serious strain on the tools the European Central Bank has built to keep bond markets from panicking, according to a note from Rabobank.
Germany, France, Italy and Spain together generate 60% of the eurozone's GDP, which is why trouble in any of these four capitals tends to ripple through the wider currency bloc. Rabobank pointed out that the region does have safeguards in place, a rules-based EU structure run largely by technocrats, and the ECB's Transmission Protection Instrument, a mechanism that lets the central bank buy government bonds from eurozone states when markets turn disorderly for reasons that have nothing to do with a country's actual economic fundamentals.
Rabobank framed just how unusual that kind of intervention would look outside Europe, noting that if the US Federal Reserve under Warsh were to entertain a similarly aggressive bond-buying backstop in today's market environment, the reaction would be one of outrage. The bank's real question, though, is whether the Transmission Protection Instrument could keep functioning smoothly if political trouble in Germany, France, Italy and Spain all flared up at once, rather than in just one country. Rabobank was also careful to frame this as bigger than a purely European worry, arguing it is no more a 'European' problem than it is a 'US' one.
That question matters because the Transmission Protection Instrument is designed to step in only when bond market stress cannot be explained by a country's own fundamentals, in other words when investors are punishing a government for reasons beyond its control. If political instability broke out simultaneously in Germany, France, Italy and Spain, the ECB could find it far harder to draw that line and justify stepping into any single country's bond market without the intervention looking like it favours one government over another.
Melenchon wants the ECB to cancel French debt it holds
The political strain Rabobank is flagging is already visible in France. Melenchon, a French far-left presidential candidate who has been pushing for higher public spending, has proposed wiping out a chunk of French government debt sitting on the ECB's own balance sheet. "I propose to all the states of the eurozone to cancel this debt held by the ECB," he said, arguing that because every eurozone country is part of the same currency system, the debt in question is essentially owed by France to itself.
Melenchon also pushed back on criticism of the idea, saying the media establishment tried to twist his proposal but that it took only a few days of explaining to counter what he called their distortions. He pointed to a poll showing that more French people now back the debt cancellation plan than oppose it. On top of the debt proposal, Melenchon said he wants to set up a public banking hub, arguing that France has substantial financial resources to draw on.
