The ECB raised its three interest rate by 0.50 points, and announced further similar steps in the future—officially motivated by fighting inflation, but also seen as preventing drainage of capital towards the dollar. Now, the minimum rate is at 2%. Additionally, the ECB will start reducing its balance sheet in March, selling 15 billion bonds from the APP program each month. The Pandemic Emergency Purchase Program (PEPP), however, will be rolled over until the end of 2024. The ECB will change policy only if there is a dramatic recession, but it forecasts only a “mild” one.
The ECB is thus raising the cost of money at precisely the moment that all 19 governments of the Eurozone are engaged in a spending orgy to offset energy-induced price increases. Thus, governments will pay more to borrow money. This raises the danger of a sovereign debt crisis for debt sinners such as Italy.
Asked by journalists about the missing ratification of the European Stability Mechanism by Italy, ECB President Christine Lagarde launched a warning: “We hope that Italy quickly ratifies the reform of the ESM, since it is an integral part of the completion of the banking union,” she said. There is a reason why the Italian government/parliament did not ratify it. The ESM means that in case of a liquidity crisis, Italy must de facto surrender control to EU fiscal caretakers in order to have central bank support.
Yesterday, three members of the Italian government attacked the ECB’s decision. Foreign Minister Antonio Tajani said, “I have always been very skeptical of the decision to raise rates in Europe,” in an interview with RAI. Defense Minister Guido Crosetto tweeted “I did not understand the Christmas present that President Lagarde gave to Italy,” as his comment on a chart showing the zooming spread between Italian bonds and the German benchmark yesterday. In a second tweet, Crosetto wrote that the recent ECB decisions were “taken and communicated with superficiality and detachment.”
Lega head and Infrastructure Minister Matteo Salvini stated: “It is unbelievable, disconcerting and worrying, that while there is a government that is doing everything to increase salaries and pensions and cut taxes, the ECB, on an afternoon in mid-December, approves a regulation that burns billions of euros of savings in Italy and all over Europe, causing the spread to skyrocket.”
Salvini referred to the collapse of stock and bond markets globally yesterday and today.
