Draghi revolutionizes the ECB for the second time | Economy

Mario Draghi bids farewell to the presidency of the ECB, handing it over to the current president, Christine Lagarde, in October 2019
Mario Draghi bids farewell to the presidency of the ECB, handing it over to the current president, Christine Lagarde, in October 2019Pool (Getty Images)

For the second time Mario Draghi revolutionizes the euro map. As president of the ECB he prevented its bankruptcy in July 2012 with the words: “I will do whatever it takes” to save it and “believe me, it will be enough”. He immediately created a mechanism to help vulnerable countries, direct monetary transactions (OMT, for its acronym in English), through which he would buy their debt but only under strong conditions, that is, with a total rescue request from the affected country. It didn’t get used. The mere but resounding invocation of him was enough as a magic wand against speculators to put an end to the southern sovereign debt crisis. And from there he accelerated his expansionary monetary policy.

Exactly ten years later, the stability of the eurozone depends on him again —now as Italian prime minister. If today he confirms his announced resignation from the post, tomorrow the governing council of the central bank will be forced to create the instrument —publicly promised on June 15 at an emergency meeting to calm the markets— dedicated to preventing the fragmentation of the eurozone , or Transmission Protection Mechanism (of monetary policy).

But even if Draghi reverses course and remains in Palazzo Chigi, his knock has equivalent effects: he has already dramatically visualized the danger of a return to “fragmentation” of the eurozone. It is enough for him to withdraw for the risk premium or extra cost of the Italian debt to increase rapidly over the German one (in 10-year bonds); and therefore the excess return of investors in Italian government securities; or the differential to which an Italian company or family must borrow compared to an identical German one: these are the three faces of “fragmentation”. If this makes an appearance, it causes monetary policy to be unable to “transmit” itself, to obtain similar results (equivalent rates or very close to each other) in all the countries of the eurozone, making it impossible for the central task of the ECB, which is to develop a single policy for all.

Since the crisis of the Italian Government was cooked ten days ago, the premium has increased by ten percent, almost twenty basic points (0.2%) over 200 (2%). Since a year ago it has doubled. Since September, the profitability of the good it has gone from 0.5% to 3.3%. At the smell of the rise in interest rates, the markets become obsessed with debt (150% of GDP in Italy; 69% in Germany), they demand more profitability to buy it and thus, at higher rates, the more burdensome it will be. your utility bill; even though all Treasuries have taken advantage of the interest boom to replace old securities with cheaper ones at longer maturities, thus reducing their immediate cost. All this will worsen in the face of a collapse of the Draghi government. Except…

…Unless it triggers the immediate creation of the Mechanism. This is what Frankfurt is up to. There are signs that the Italian knock is causing the sudden forging of a consensus between its two dominant sensibilities. On the basis that the hawks get a bigger rate hike (say, in September of 0.5% or even higher, or even sooner), satisfying their tightening anxiety, albeit gradually. And that the pigeons facilitate it, giving in to their misgivings about the eventually recessive effects of any rise, but in exchange for avoiding what they immediately judge to be worse: fragmentation. And therefore, that higher rates and the erection of the Anti-Fragmentation Mechanism (against unjustified premiums according to the fundamental data of each economy) go hand in hand.

The design of this mechanism involves severe dilemmas. One, from what threshold is a premium considered excessive: there is talk of a reference basket of healthier debts and an implicit percentage on them (the German Joachim Nagel fears that it is arbitrary, arguing that it is “practically impossible” to calculate it).

Two, what size or fire capacity should it have: the Belgian Pierre Wunsch, not very expansive due to how indebted his country is, demands that it be “as unlimited as possible”, beyond the reinvestment of the pandemic program bonds that have reached his end, about 200,000 million annually, judged insufficient.

Three, the conditionality must be light, even the Bundesbank speaks of “strictly defined conditions”, but not of “strict conditions”; Otherwise, either it will not be used or the ECB will be embarked on an improper task, directly controlling the fiscal policy of the 19 governments. The idea of ​​an appeal to the digestible requirements of Brussels to approve the recovery and resilience plans of the Next Generation-EU program, or to a specific validation of the Commission (Fragmentation risk in the euro area: no easy way out for the ECBBruegel for the European Parliament, June 2022).

And four, who validates the assets [colaterales] used as collateral? Rating agencies, as has been the custom?: “All rating”, maintains the former executive director Lorenzo Bini. And it is that it is an unsustainable privatization of a part of the monetary policy, which by definition is public.

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