Crédit : De gauche à droite : la présidente de la BCE, Christine Lagarde et la présidente du Conseil des ministres italien, Giorgia Meloni. Arne Dedert/dpa - AAPIMAGE via Reuters Connect

Rising prices: the cause of the burning breach between the European Central Bank and Italy

Tensions are rising between Italy and the European Central Bank. While the institution has been active for more than six months trying to slow inflation, Rome takes a dim view of the new strategy laid out. The government led by Giorgia Meloni blames the European Central Bank to aggravate The economic situation of the country.

“There is no need for a Nobel Prize, it is enough to have the common sense of the housewife to understand that some decisions have negative effects because they magnify the crisis,” Defense Minister Guido Croceto was shot down on January 4 in a daily interview La Republicadenunciation “The sudden change in central bank policy (which) is likely to have a particularly negative impact on us.”.

In question, the European Central Bank’s decision to tighten monetary policy. Since July, it has raised its core rates four times, first by 50 basis points, then by 75 points on two occasions, and then back up by 50 basis points. In addition, the European Central Bank announced the end of its public debt buyback program that was launched in 2015 and aimed at large-scale buybacks of public bonds on the secondary market, where economic agents can buy and sell existing financial assets. In other words: the European Central Bank bought back debt issued by countries in order to lower financing costs and thus stimulate their economy.

He was not the only one who launched such programs, as the US Federal Reserve, which also put an end to them. Because if until then the goal was to combat deflation so that it stabilized at 2%, now the price-rising curve has now exceeded this threshold as significantly in the eurozone as it is in the United States or elsewhere. So central banks were forced to reverse their policy, this time to fight inflation. It reached 9.2% in December within one year in the eurozone.

“In a way, it was the European Central Bank that financed the public debt of eurozone governments. However, this is not part of their mandate, which is to keep inflation at around 2%. Given the current context, the institution believes that by purchasing public debt securities, It encourages governments to increase their public deficit to allow households to spend more, which fuels higher prices.By ending the buy-back programme, it intends to push governments to undertake structural reforms to reduce public spending and thus slow inflation.Sandrine Levasseur, economist at the French Observatory of Economic Conditions (OFCE) – Sciences Po.

Going into debt will cost states more

However, this new strategy has a particular impact on Italy, the most indebted country in the eurozone after Greece. Its public debt is 150% of GDP. In comparison, France accounts for 113% of the country’s GDP and about 70% for Germany. A price hike could be “An understandable choice, but no longer intervening in public debt issues as before is something that is difficult to understand and justify.”so Guido Crosetto argued. Just look at the Finance Act.” In the year 2023, he fires, stating that it will take a while “More than 20 billion euros more than last year to pay interest on the public debt “.

The end of the public debt buyback program by the European Central Bank “There will be a rate hike for any country that wants to take on more debt.”Sandrine Levassor sums it up. And for good reason, they will no longer be able to borrow from the institution but from the most financial markets “demanding”.

Indeed, the European Central Bank’s announcement of the end of its repurchase program last June sent Italy’s 10-year borrowing rate soaring. The latter jumped above 4%, the first since 2014, before falling. However, a threshold too high would penalize Rome greatly for raising money in the markets, the latter expressing concern about its ability to repay the sums borrowed. “From the point of view of growth or even productivity, the markets have the impression that the German economy, for example, is healthier than Italy. Therefore, they lend more easily to the first category and at lower rates.concludes the economist.

ECB rate hike: Italy, the eurozone’s nightmare

This unexpected increase in particular widened the gap between the Italian 10-year interest rate and that of Germany, as a reference because it is the country that borrows at the lowest rate in the Eurozone. This gap is dubbed “spread” has reached 200 basis points. If this remains far from the 600 points recorded during the eurozone crisis in 2011, it was enough to raise fears of division within European economies.

New support tool subject to terms

To assuage Italian fears, the President of the European Central Bank, Christine Lagarde, then promised an anti-fragmentation tool. Dubbed the Transfer Protection Instrument (TPI), it was approved on July 21 and It will ensure that the monetary policy stance is transmitted smoothly across all eurozone countries.explains the European Central Bank. he can be activated for Face the unjustified and undisciplined market dynamics that seriously threaten the transmission of monetary policy in the eurozone »And Enterprise adds.

more accurate, “The Eurosystem may make purchases on the secondary market of securities issued in jurisdictions experiencing deteriorating financing conditions that are not justified by country-specific fundamentals.”. It has also been specified “The size of TPI purchases will depend on the severity of monetary policy transmission risks.”.

But this is not the only criterion imposed by the ECB. She defines, in fact, that “The Board will review a cumulative list of criteria to assess whether the jurisdictions in which the European system can make purchases under TPI are pursuing sound and sustainable macroeconomic and fiscal policies.”.

gold The European Central Bank rightly considers that Italy is not doing enough to reduce its public debt.Sandrine Levassor confirms. For its part, the Italian government criticized the establishment for its rhetoric targeting Italy, without naming it, under the pretext that “It feeds the fire and thus encourages the higher interest rates demanded by the markets,” She adds. while maintaining “respect” The independence of the European Central Bank, the President of the Italian Council of Ministers, Giorgia Meloni, appreciated it In the situation we find ourselves in, it would be best to avoid making choices. Which exacerbates the situation. “It would be worthwhile to manage the communications well, otherwise we risk generating, not panic, but volatility in the markets that endangers the work that governments do on a daily basis.”I warned.

For or against: Should budget strictness and government spending cuts be reconnected? (Jean-Marc Daniel v Thibault Laurentjoye)

Should we expect a refusal from the ECB to help Italy if the latter risks bankruptcy? An unlikely scenario, according to the OFCE economist. The danger is that a sudden surge in borrowing prevents the country from meeting some of its maturities and that it finds itself in bankruptcy. But this scenario would greatly shake the eurozone because it could lead to the exclusion of Italy, one of its founding countries. Then we wonder about the feasibility of the economic zone. No country, even those reputed to be the toughest, has an interest in such a disintegration.decompose.

However, help will not come without consideration, she warns, making it clear “Once Solidarity is established in the European Union, it is clear that the institution will have certain demands and Giorgia Meloni does not want to find itself under the supervision of the European Central Bank by imposing measures on its budget stringency”. What let’s look at the real confrontation between Enterprise and Rome.