It is not a simple choice. The European Central Bank will intervene against the risks of financial fragmentation in the Eurozone: after the crisis of 2011, it is a necessary choice. Just talking about it has had important effects on the markets, with a reduction in spreads. The application of this principle, however, hides several pitfalls.
The “fragmentation” that the ECB is preparing to oppose with a new instrument now translates into too high spreads. Countering them means buying bonds from countries with high yields, possibly selling bonds with lower rates. Simple? In no way. A tolerance threshold could be set (200 basis points? 300? 400?); but the risk is that, even if not explicit, investors – may “challenge” the central bank and its determination to defend it. In the rare – not surprisingly – interventions on currencies always happen. Moreover, exceeding a threshold is too little to justify an intervention in the markets: perhaps the ECB will ask itself – and the words of Isabel Schnabel, a member of the board, go in this direction – to intervene only when the risk of ” spirals of disruptive and self-fulfilling prices on the sovereign bond markets that threaten the cohesion of the single currency ». As happened in 2002, when the ECB supported the euro / dollar exchange rate crushed by «bets in one direction only»: all towards the downside. In short, a real market pathology is needed for the Central Bank to intervene.
The ECB cannot finance – by treaty – individual governments, nor can it feed the moral hazard, opportunism, of countries that insist on not making such reforms – whatever they may be, one might add – as to stimulate growth. It is no coincidence that Schnabel hinted at a certain conditionality of the new program under study.
It is also important to be clear about the circumstances in which the ECB’s monetary policy falls at this stage. The total inflation (and therefore the real rates, even the official ones) and the core inflation (that is, which can be attacked by the central bank) of the individual countries, have never been so dispersed, far from each other. It goes from 20.1% in Estonia to 5.8% in France and Malta for the total index, and from 13% in Lithuania to 3.4% in France and Italy for the core. Never as in the past will the single monetary policy affect differently from country to country. Fragmentation starts here and will be inevitable. We cannot think that the ECB can aim for equal real yields in every state: the markets would challenge it and the instrument in preparation is an “emergency”. In short, Italy has not received a free ticket to enter a broader fiscal policy room. However, the constraints will become more rigid.