IT WAS ALMOST ten years to the day since Mario Draghi, then the president of the European Central Bank, ended the most acute phase of the euro-zone crisis with the assurance that he would do “whatever it takes” to keep the currency bloc together. Now, with risks of a fresh debt crisis looming, Christine Lagarde, his successor as ecb president, unveiled the bank’s latest attempt to make good on that promise. The Transmission Protection Instrument (tpi), announced on July 21st, is a bond-buying scheme intended to prevent the spread in borrowing costs between euro-zone governments from widening so far that troubled countries would be at risk of a forced exit from the currency.
The need for such a tool is apparent. Shortly before the central bank’s meeting Mr Draghi resigned as Italy’s prime minister, a role he had unexpectedly taken up last year at the head of an unwieldy coalition. The turmoil in Rome placed further pressure on Italian bonds, which were already facing higher interest rates amid a potential economic slowdown. Rising bond yields risk trapping Italy in a self-reinforcing cycle of higher borrowing costs, worries over the sustainability of its debt and, ultimately, fears that the third-largest economy in the euro zone could not survive inside it.
The unlimited asset purchases and, potentially, unlimited latitude for ECB intervention promised by the tpi should alleviate those worries. The instrument is open-ended in size, allowing the central bank to buy as many assets as it sees fit, including not just government bonds but also those from the private sector. Any sell-off in government debt would have to be “disorderly and unjustified” for the ECB to take action—but the bank has claimed unlimited discretion to define these terms for itself. Ms Lagarde said that the ECB has the “sovereignty” to determine eligibility criteria itself, a word not often heard from the mouths of central bankers.
The ECB has left itself much less flexibility, however, when it comes to determining which countries are eligible for the scheme. To win tpi support governments must not be subject to the excessive deficit procedure (edp), a mechanism used by the European Commission to enforce the euro area’s fiscal rules; nor the eu’s excessive imbalance procedure, which assesses a broader set of macroeconomic indicators. A country’s public debt must be “sustainable”, and its fiscal policies “sound”. But in making these judgments the ECB said it will take into account the views of other organisations, including the imf.
The ECB has therefore given itself the maximum room for manoeuvre in forestalling any repeat of the euro-zone crisis, while handing to others the politically delicate task of deciding whether governments’ fiscal policies are appropriate and their debt sustainable. This in turn raises the stakes for the commission when deciding whether to place countries into the edp: an assessment that a troubled country has breached the fiscal rules now risks making it ineligible for monetary support. That could provoke a flight from its debt, as well as confrontation with Brussels.
Such is the price of consensus. Ms Lagarde boasted that the tpi won unanimous backing in the ECB’s often-fractious governing council. Hawks had worried that the scheme would prevent markets from disciplining poorly run governments and making accurate appraisals of their solvency. Doves fretted that making it too strict would render it pointless. The ecb’s separate decision to raise rates from -0.5% to 0%—its first increase in over a decade, and a larger one than investors had been led to expect by the bank itself—may also have helped the hawks on the council reconcile themselves with such a big intervention in government-bond markets.
Either way, Italy’s borrowing costs fell after the meeting as investors digested the details of the scheme. The euro zone faces a difficult few months, with energy bills soaring, a potential hard-right government taking office in Italy, and Russia’s war in Ukraine continuing to fuel economic uncertainty. But making “whatever it takes” subject to the economic judgments of the Eurocrats in Brussels may be enough for now. ■