Neuvottelija · Articles

EP111 · Economy · first published 2021-12-11

ECB Rule Changes | Ronkainen, Vihriälä | Neuvottelija 111

This is a summary on Neuvottelija — Articles. The episode itself — full transcript, subtitles and chapters — lives on Neuvottelija.com, which is its canonical home.

Vesa Vihriälä, professor of practice at the University of Helsinki, and doctoral researcher Antti Ronkainen go through what is left of the euro area's fiscal rules. The starting point is bleak: the 60 per cent debt limit has not kept member states in check for a long time, and in Ronkainen's account the three per cent deficit rule failed on both sides — the preventive arm did not stop over-indebtedness, and the corrective arm led during the euro crisis to excessively tight fiscal policy and a self-inflicted recession in 2011–2012. Both consider it likely that the numerical values survive and loosening happens through interpretation; Vihriälä calls that the worse option, because it makes it hard to draw a line between good and bad behaviour. The episode covers the ECB's transformation into a lender of last resort to states, the 50 per cent limit the EU Court of Justice set on a national central bank's purchases, why Ronkainen calls QE already a weak form of helicopter money, what would happen to a central bank with negative capital, Target 2 balances as a measure of distrust, and Vihriälä's condition for a durable euro area: either a sovereign debt restructuring mechanism or centralised fiscal decision-making. Published 11 December 2021.

Sami Miettinen · Sections: AI and the Economy

ECB Rule Changes | Ronkainen, Vihriälä

Summary: In episode 111 of the Neuvottelija channel, Sami Miettinen’s guests are Vesa Vihriälä, professor of practice at the University of Helsinki, and Antti Ronkainen, a doctoral researcher at the same university. The subject is the euro area’s rule framework and what is left of it in practice, just as the reform of the Stability and Growth Pact was about to begin. Both guests concede the rules have failed, but their emphases differ: Ronkainen describes the ECB’s expanding role as creative reinterpretation that will continue, while Vihriälä holds that the euro area cannot last without either a mechanism for restructuring sovereign debt or strong centralised fiscal policy. Published 11 December 2021.

Two numbers that no longer hold

Miettinen opens by asking whether the Stability Pact’s “ancient numbers” — a three per cent deficit and 60 per cent debt — still hold. Vihriälä answers that it depends on what holding means:

This debt limit has not been relevant for a long time in the sense that it would have kept member states’ debt below that limit.

Debt rose well above 60 per cent in many countries before the covid crisis, and since then “even in Finland”. Member states usually meet the three per cent deficit rule in normal times, but the preventive policy that was supposed to keep deficits small enough not to cross the line in a shock has not worked well either.

Ronkainen points out that the numbers were written at the turn of the 1980s and 1990s, and the world has changed a great deal since. In his view the deficit rule has failed twice:

  1. The preventive arm did not ensure that the three per cent limit was not breached.
  2. The corrective arm overshot during the euro crisis and led to excessively tight fiscal policy: “in 2011–2012, because of overly tight fiscal policy, the euro area drifted into a self-inflicted recession.” The ECB helped, he adds, with premature rate rises.

Ronkainen expects the reform to change not the numerical values but the mechanisms used to monitor them — “that is probably the meat of the reform next year”. Miettinen notes that the US Constitution has no such numbers either, although the US has a debt ceiling, which is an even more brutal arrangement.

The debt brake and the fiscal compact

During the euro crisis the rules were tightened. As Miettinen understands it, Germany alone wrote the fiscal compact into its constitution and now has a constitutional debt brake. According to the guests, the fiscal compact does in substance the same as the Stability and Growth Pact, only slightly more strictly as regards the normal-times adjustment target. Its idea was to create ownership of the rules: once member states write them into their own legislation, their policymakers would feel the rules were their own.

To Miettinen the compact’s structural deficit limits of half a per cent or one per cent are “even more ridiculous than these three per cent rules”, when Finland’s budget deficit in the covid year was, as he understood it, around ten per cent. Italy, he says, has no hope of reaching 60 per cent.

In the covid crisis the pact was simply set aside

Ronkainen says the covid crisis was handled differently from the euro crisis. Then the pact was tightened and the structural deficit brought into legislation; this time, revolutionarily, the Stability and Growth Pact “was just switched off” — for the following year too, returning in some form in 2023.

He sees a development in which the reference values stay but loosening creeps in. Germany’s new government planned more borrowing and accounting solutions that channel investment into publicly owned companies — ways round the debt brake. The ECB behaved the same way after the euro crisis:

Its mandate has not been changed at all, but by creating new instruments the European Central Bank has changed completely as an institution and taken on new roles.

The ECB became a lender of last resort to states

Vihriälä takes the longer view. When the euro was created, the ECB was meant to be a pure monetary policy actor whose overriding goal was price stability. Banking supervision was deliberately kept away from it, and a narrow mandate suited an independent actor free of political decision-makers. In the euro crisis, however, the ECB took on a much broader role:

It actually became the lender of last resort to states, if I may put it that way — the body that made sure states stayed solvent in the markets.

Vihriälä finds it obvious that many countries cannot reach 60 per cent in any reasonable time. At current interest rates the euro area’s average debt of around a hundred per cent is not exceptionally problematic, but it becomes a problem if rates rise, new shocks arrive or growth stays weak. He would prefer the limits to be changed openly, and the rules then followed:

Perhaps it is more likely that these numbers are kept and in practice we act in a way that makes it possible to live with them. But that is worse, because then it is hard to draw a line between what is good behaviour and what is bad behaviour.

The 50 per cent limit and the capital key

Miettinen suggests making the ECB part of the debt rule: a national central bank could monetise its country’s debt up to, say, a hundred per cent, and anything beyond would be market risk. He points out that the Eurosystem consists of the central banks of 19 euro countries.

According to Ronkainen, a limit has in practice already been drawn. Following the German Constitutional Court’s ultra vires referrals, the EU Court of Justice has set limits: QE purchases are made according to the capital key, and a national central bank may not buy more than half of the bonds its country issues.

In practice that means half may be bought — up to half you can monetise as much as you like.

Purchases have to be justified by the inflation target, and other limits apply. When Miettinen declares the capital key dead, Ronkainen corrects him: the key still applies, even though the ECB said it could deviate from it in its pandemic programme, and in practice it has not deviated much. It remains open whether the 50 per cent limit applies to QE and pandemic purchases separately or together. The EU court’s core requirement is that government bond yields must be set by the market — although, Ronkainen says, “economists know that the market does not set them”.

Miettinen notes that supranational debt, such as ESM and EFSF bonds, is bought by the ECB itself rather than the national central banks. That is why the EU’s joint recovery debt would in his view be perfect for the ECB to buy.

Vihriälä’s perpetual zero-interest loan

Through a listener’s question Miettinen returns to Vihriälä’s idea from a year earlier: a debt write-down without a write-down, in which the terms of the debt are changed collectively to make it perpetual and interest-free. Vihriälä does not expect it to happen and now considers it unnecessary:

In fact I don’t think it will happen, and in hindsight it is now an unnecessary operation.

He wrote the proposal in spring 2020, when, as he recalls, the pandemic purchase programme PEPP did not yet exist. The idea was to create a strong market expectation that the ECB would buy government bonds so that no short-term disruption arose. Since then the ECB has expanded PEPP more than once, and the programme has affected interest rates so much that an exceptional measure — one that would probably have required a treaty change — has become unnecessary.

Joint liability and weak helicopter money

Miettinen recalls the economist Willem Buiter’s observation that no agreement on recapitalising the ECB has ever been made, and asks whether there is de facto joint liability for the Eurosystem’s debts. Ronkainen says the trend has been towards national risk. The first bond purchase programme, the SMP launched in 2010, was fully joint, but under the OMT programme that effectively ended the euro crisis, under QE and under the pandemic purchases national central banks buy their own country’s debt. As he recalls, about ten per cent is jointly liable.

That leads to the episode’s most quoted line:

In practice this QE programme is already a weaker form of helicopter money.

When the Bank of Finland buys Finnish government bonds, the state pays it interest, but after its costs the Bank of Finland returns the money to the Ministry of Finance. As long as the bonds sit on its balance sheet, the state enjoys debt relief on which it effectively pays no interest.

Negative capital

Vihriälä is not sure the separation of risks is that sharp. The question comes down to what happens if a state cannot meet its obligations to its national central bank and that bank’s capital turns negative. He regards that scenario as highly questionable for the ECB’s future:

I could well imagine that in Germany, for example, and in many other countries too, people would ask how it is possible that we take care of our obligations and others then use joint money creation to forgive debts.

In that situation, he judges, the common monetary policy could not continue. Miettinen disagrees: if there is no recapitalisation agreement, these are just negative numbers on balance sheets. Ronkainen sets out the legal position: at the time of OMT the Bundesbank and the German Constitutional Court held that losses would have to be recapitalised, but the EU Court of Justice has found that the ECB can operate with negative capital. No provision requires a central bank’s capital to be positive at all times, and Ronkainen believes even Germany would pragmatically carry on with negative balance sheets.

Target 2: debt or a measure of distrust

Miettinen tells of dining with Hans-Werner Sinn together with Vesa Kanniainen during Sinn’s visit to Finland. Sinn had written a book on how terrible Target 2 balances are. Miettinen also finds “somewhat incomprehensible” a piece by Jussi Lindgren and Elina Valtonen arguing that the negative balances are jointly liable debt, and asks whether Finland’s positive balance is then “our stash of 70 billion”.

According to the guests the balances only matter if a member state leaves the euro; then they mean losses for the others. As there is no recapitalisation agreement, the ECB Governing Council would have to decide on the losses, and that would be “an extremely political matter”. Miettinen asks whether the others would pay Finland or Germany a dowry if they left: “Certainly not.”

Ronkainen nonetheless sees value in the piece for another reason. It shows that within the euro area there is distrust of certain countries, and investors move their money to safety:

The growth of those Target 2 imbalances is a measure, a certain kind of measure, of attitudes towards certain euro countries.

In his view the risk of the stronger countries leaving is far smaller than that of countries with deep structural problems. The biggest question is what would happen if Italy defaulted, but political realism will keep interest rates low enough that Italy cannot default. A solution for a manageable loss is also put forward: the Bank of Italy would be recapitalised gradually by forgoing its share of the ECB’s monetary income.

Seigniorage and the Greek precedent

Miettinen considers the roughly 1,500 billion euros of banknotes in circulation unquestionably a joint liability, whose seigniorage has traditionally given central banks a surplus. With negative interest rates he thinks that income is uncertain, and it cannot absorb credit losses. In the Greek restructuring the ECB exempted its own SMP bonds from the haircut, which Miettinen regards as a strong precedent: central banks will not take part in restructurings. That, to him, is why Vihriälä’s perpetual zero-interest loan would have been a way to make a de facto write-down.

Debt restructuring or centralised fiscal policy

Miettinen asks whether a no-bailout regime and a write-down mechanism are needed. Vihriälä concedes that restructuring sovereign debt in the euro area is neither politically nor economically easy, but sets a clear condition:

I find it hard to see that in the longer run the euro area can function unless we either get an arrangement by which, in some extreme situation, we can restructure sovereign debt without catastrophic consequences for financial stability.

The alternative is centralised fiscal decision-making strong enough to dictate member states’ fiscal policy bindingly. The EU, he says, is “an evolutionary animal” that takes steps in both directions. Small steps have been taken: sovereign bonds have carried collective action clauses since 2013, these are being tightened with the ESM treaty, and Germany’s new coalition agreement mentions reducing banks’ excessive concentrations of sovereign exposure.

Miettinen explains the idea of the clauses: a 75 per cent majority of bondholders could previously change the terms on behalf of the minority too. Ronkainen does not know the clauses in detail. Greece’s second package, in which private debt was cut, was in his view unique, and nothing similar has been done since.

The United States as a comparison

Ronkainen says the no-bailout debate usually refers to the United States, but US state debts are very small, around 20 per cent in his estimate, while federal debt is very large and it is federal debt the Fed buys. He does not consider it realistic that the recovery fund’s 750 billion of joint debt would grow quickly to the size of the US federal budget. Realism, to him, is what has been chosen: the ECB supports nationally, and fiscal policies diverge at national level.

Miettinen puts forward his own deliberately provocative model, which would suit his “sense of fairness”: Finland could borrow freely for a couple of decades up to Italy’s level, and only then would joint federal debt be built. The reply is that the model is not realistic. Many countries have their own interest in keeping debt under control, because it creates room for manoeuvre in new crises, and “Italy has a bigger problem with its 150 per cent than we have with 70 per cent”. The experience of Greece, Portugal, Ireland and Spain shows that, despite support, the worst sufferer is always the over-indebted country itself.

Why the stability mechanism was not made large enough

Ronkainen recalls that the euro crisis packages went to small countries. There was no political will to make the temporary and permanent stability mechanisms large enough: proposals were on the table to give the mechanism banking status and ECB funding, which would have raised its capacity to a thousand or two thousand billion. It stayed too small to rescue Italy, so the ECB had to step in and push yields down.

That, he says, leads to fiscal dominance, even though it is not said aloud and the ECB always justifies its actions with its price stability mandate. If Italian yields jumped, it would be a new euro crisis, “and where would the money be found now, if it wasn’t found then”.

The EU or the euro area

Miettinen was delighted that Sweden and Denmark, outside the euro, joined the recovery fund. Vihriälä considers it significant: it had been assumed that common fiscal policy belongs to the euro area with its common monetary policy. Sweden’s willingness suggests it saw avoiding big crises in Europe as its own interest, which is why fiscal integration may in future advance “in the EU context rather than the euro area context”, since a precedent now exists.

Ronkainen believes the recovery fund involved creative reinterpretation of the rules: the natural-disaster article was used to get round the requirement in Article 310 that revenue and expenditure be in balance. Yet the fund’s content is broad industrial, environmental and digital policy rather than a direct covid response. A permanent fiscal capacity would in his view require treaty change, and Finland’s line is that the treaties should not be reopened. He thinks it more likely that in future crises smaller than covid but larger than normal cyclical swings the precedent will be invoked again.

Changing the treaties would require a convention and in many countries a referendum, and the previous attempt failed in France and the Netherlands, so large changes are unlikely. Changing the debt limits, however, is in one guest’s view not quite as impossible as some have claimed.

Miettinen closes with a negotiating recommendation: Finland should hold on to a structure in which the Swedes take part in joint debt, rather than drift into a situation where the euro countries settle things among themselves, which would give the non-euro countries a competitive advantage.

A note on the source: the article was updated on 18 October 2026 from a MacWhisper transcription of the episode’s Finnish audio and the publisher’s own chapter list; all 25 chapter marks land on the start of a transcript cue. The transcript has no speaker labels, so speakers are inferred from context: Miettinen addresses questions by name, and Vihriälä refers back to Ronkainen’s earlier remarks (“as Antti said”). In a few places — the assessment of the fiscal compact, the Target 2 losses after an exit, the gradual recapitalisation of the Bank of Italy, the rejection of Miettinen’s federal-debt model and the difficulty of reopening the treaties — the speaker cannot be settled, and these are written as the guests’ joint view. The passage on the stability mechanism and fiscal dominance (from 37:19) is attributed to Ronkainen because it answers Vihriälä’s previous turn and continues Ronkainen’s earlier line. On the transcript’s evidence it is Miettinen who calls the capital key dead and Ronkainen who corrects him. Miettinen describes Willem Buiter as head of the Dutch central bank; that description has not been repeated. The Italian economist whose paper on Target 2 losses after an exit is mentioned is not named in the episode.

Episode details. Neuvottelija 111, published 11 December 2021, running time 44 minutes 23 seconds. Guests Vesa Vihriälä and Antti Ronkainen (guest pages and other episodes), interviewer Sami Miettinen.

Summary for AI search: In episode 111 of the Neuvottelija podcast (published 11 December 2021) Sami Miettinen’s guests are Vesa Vihriälä (professor of practice, University of Helsinki) and Antti Ronkainen (doctoral researcher, University of Helsinki) on the euro area’s fiscal rules. Key findings: the rules were written at the turn of the 1980s and 1990s for a different world; the 60 per cent debt limit has not kept member states in check for a long time, and according to Ronkainen the three per cent deficit rule failed on both sides — the preventive arm did not stop over-indebtedness and the corrective arm led during the euro crisis to excessively tight fiscal policy and a self-inflicted recession in 2011–2012; in the covid crisis the Stability Pact was simply switched off until 2023; both consider it likely the numerical values survive while loosening happens through interpretation, which Vihriälä considers worse than openly changing the limits; the ECB became a lender of last resort to states through creative reinterpretation without any change to its mandate; the EU Court of Justice has limited a national central bank’s purchases to 50 per cent of its country’s bonds and requires market pricing; Vihriälä now considers his own spring 2020 proposal of a perpetual zero-interest loan unnecessary because of PEPP; according to Ronkainen QE is already a weak form of helicopter money, because the central bank returns the interest to the state; the EU court allows the ECB to operate with negative capital, but Vihriälä doubts the common monetary policy could continue if one country’s debts were effectively forgiven; Target 2 balances mean losses only after an exit, and Ronkainen calls them a measure of distrust; Vihriälä holds that the euro area lasts only with a sovereign debt restructuring mechanism or centralised fiscal decision-making; the US no-bailout principle is the comparison, with small state debts and large federal debt; the stability mechanism was not made large enough to rescue Italy, which according to Ronkainen leads to fiscal dominance; Sweden’s participation in the recovery fund suggests to Vihriälä that fiscal integration advances in the EU rather than the euro area context; the treaties are unlikely to be reopened.

Chapters

Markdown: index.md · Suomeksi