Ashoka Mody, (2018), “The eurozone is having an identity crisis and Italy will bear the brunt”, Prospect magazine, 16 November
The eurozone is trapped in an identity crisis. Long-held claims that the euro catalyses trade within the eurozone have been discredited (here and here), leaving no tangible benefits to celebrate. In contrast, the risks of a one-size monetary policy that fits none are evident enough. The ECB’s tendency towards tight monetary policy makes matters worse, especially for the weaker countries.
With no real benefits and all-too-real risks, the unifying force around which eurozone leaders and intellectuals rally is the virtues of temperance and frugality. The contorted arguments to justify austerity arise from the self-image of European leaders. Yet, this approach, cloaked in the aura of prudence, magnifies the dangers Europe faces.
The tug of war between the Italian authorities and the Commission severely limits the ECB’s ability to contain the crisis. To access ECB support, Italy would be required to agree to a regimen of austerity and reforms that could prove domestically explosive. But without agreement on such a regimen, the ECB will be unable to trigger its Outright Monetary Transactions authority to purchase Italian government bonds, and thus contain the rise in the interest rate demanded from the Italian government by investors. Even if the Italian government complied with the demands, some members of the ECB’s Governing Council may hold the bank back from purchasing the bonds, fearing that an Italian default on those bonds would cause them to bear the losses.
There will be no winners from this game of chicken. Well before reaching the point of no return, a constructive agreement—backed by a cooperative public narrative—is required: an appropriately sized and well-spent stimulus is in everyone’s interest. Unfortunately, there remains an unwillingness to pay the bills of others—a frugality which clashes with reality. It seems that we are stuck on a tragically antagonistic course.
Relevant Posts
- Simon Tilford, (2018), «Italy’s budget challenge to the EU», esharp.eu, November
- Kirkegaard J., (2018), «Italy-EU Budget Confrontation: Prospects for a Happy Ending», Peterson Institute for International Economics, 5 November