As president of the European Central Bank, Christine Lagarde did not get off to a good start in her relationship with Italy. At the beginning of March 2020, with the country overwhelmed by the pandemic, you caused Rome’s government bonds and markets across Europe to collapse by simply saying: “We are not here to close spreads.” Even President Sergio Mattarella protested. Since then, criticizing Lagarde has become a political hobby in Italy, one of those Sunday sports in which it is impossible to lose in front of the jury of public opinion. So every change in the ECB’s rates was followed by a chorus of complaints, especially from the ministers of the current government, even when a year and a half ago inflation in Italy was close to 12%.
However, certain details that yesterday’s monetary policy change could also recall have gone unnoticed. Not so much that since the beginning of the pandemic the ECB has bought 300 billion of Italian public debt, without which the country would have collapsed. That was the politically easy part, unlimited support and zero interest rates. More difficult is what came afterwards, until yesterday: a series of ten rate increases (plus 4.5%) and the withdrawal of 2,400 billion euros of liquidity from the central bank’s balance sheet in less than two years, without Italy went through only one moment of real tremor while the debt rose by another 150 billion. Since May last year, the ECB has allowed Rome’s bonds worth almost 50 billion to expire without repurchasing; yet the performance gap with Berlin, instead of exploding, has decreased.
Possible? Such calm cannot be explained only by the prudence of budgetary policies, not in a country that for four years has only racked up abnormal deficits at late first republic levels and has twenty billion in deficit tax cuts with renewable deadlines. More likely, two choices from Lagarde’s ECB counted, forgotten in Italy. The first arrived at the beginning of the monetary tightening, precisely to make it possible: it was enough to announce the “Transmission protection mechanism” (TPI), purchases of securities from countries in difficulty, to reassure the markets in advance without spending a single euro. The second move concerns the choice to buy Italian bonds in the program of interventions launched during the pandemic, even when the ECB reduced its positions in other countries: German Bunds expire and with the resulting liquidity the central bank buys more Rome’s debt.
So Lagarde and her colleagues have built a double safety net around Italy, to be able to strangle inflation in the area without losing the most fragile country along the way. Few in Rome realized it. Even fewer understand that the protection of the ICC will now remain available only if the government follows Brussels’ indications on public finances. Protests from those demanding more rate cuts, more quickly, will not be long in coming from political buildings. Certainly the care taken yesterday by Lagarde in not committing to anything may be surprising. The French president even refused to admit that the first cut begins a cycle of reducing the cost of money, insisting that everything will depend on the incoming data because decisions are made “meeting by meeting”. The chief economist of Axa, former Bank of France, Gilles Moec, observes: the ECB “conveys a sense of unease regarding its own choices, it tells us that it can be certain that its current position is appropriate”.
But perhaps there is, once again, more refinement in Lagarde’s ambiguity about the cuts to come than appears to her detractors. The problem is not just that inflation in services in the euro area is refusing to go down, with the annualized rate rising to 6.5% in the last month. Nobody really understands the price dynamics of these years. But above all there is the risk that the euro will now lose its share of the dollar, making the import of many raw materials more expensive, because in the meantime American inflation is not decreasing, the Federal Reserve is keeping rates higher than the ECB and is not touching them. So Lagarde’s vagueness yesterday about future cuts serves to protect the euro exchange rate. It remains very likely that the ECB will be thinking about a new cut in September. Yesterday the euro skidded for half an hour following the announcement of the cut. But, at the end of the day, he practically didn’t move.
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