In comments that are sure to rankle critics of the current policy conjuncture that finds central banks accommodating fiscal spending aimed at resuscitating economies in the wake of the pandemic, an Italian official is now advocating for the ECB to cancel some of the bonds it bought this year.
Riccardo Fraccaro, cabinet undersecretary to Italian Premier Giuseppe Conte, insisted that “monetary policy must support member states’ expansionary fiscal policies in every possible way.”
Fraccaro, speaking during an interview in Rome, said “canceling sovereign bonds bought during the pandemic or perpetually extending their maturity” would be one way to do that.
Obviously, Italy has benefited from the ECB’s pandemic emergency purchase program (PEPP). Officials are widely expected to authorize another €500 billion in firepower for the facility at the December ECB meeting, bringing the total envelope to nearly €1.9 trillion.
The “flexibility” of PEPP (versus other ECB asset buying) is what allows it to disproportionately favor nations which need help the most during the pandemic. The October ECB minutes, released Thursday, underscored the point for the umpteenth time. “The PEPP [is] proving successful in stabilizing market conditions and reducing fragmentation, as well as easing the monetary policy stance,” the minutes read. “It was remarked that the flexibility embedded in the PEPP was essential to its continued success.”
Back in March, Christine Lagarde, still settling into Mario Draghi’s big shoes, made the mistake of saying that “it’s not [the ECB’s] job to close spreads,” a comment which led directly to the worst day for Italian bonds on record. That was a learning experience.
PEPP, by design, seeks to ensure that the pandemic doesn’t lead to unacceptable “fragmentation” risk, which is just a roundabout way of saying that the ECB isn’t going to let any virus cause a sovereign debt crisis that imperils the cohesion of the bloc. It’s been successful. Italy can borrow for cheaper than the US, which isn’t a new phenomenon, but what you’re looking at in the figure (below) is the pandemic-era trend.
Italy has a checkered history with the ECB just as it does with other European institutions. The country, under various governments, has struggled to reconcile domestic economic priorities with a large debt burden and ostensibly irresponsible fiscal policies, at least for a country that has no monetary sovereignty.
And that gets right to the heart of the issue. Having given up its monetary sovereignty, appeals for the kind of overt government financing Fraccaro made Wednesday have to be directed at an external actor (the ECB) that isn’t under any obligation to do what the Italian government says.
Note that this is possible. The ECB won’t do it, because that would infuriate Europe’s frugal nations, and would doubtlessly be decried as “illegal” in some corners, but that’s something different from saying it can’t be done.
“The ECB does not have an issue with debt — it can print as much money as it wants,” Fraccaro remarked. “It can continue to buy sovereign bonds and allow member states to invest, protecting them from the market.”
It sure can. And before you go suggesting that would lead to some kind of inflationary nightmare, I’d point you to the following visual which speaks for itself.
It sure can. But should we?
The issue there isn’t that Italy should live “within its means” or any such tripe to justify austerity and ‘blaming the poor’. But even MMT notes that the fundamental issue is real assets and the ability to mobilise them.
My issue with Europe (and I’m French, just to be clear) is that, while I believe we should be a lot more redistributive when it comes to the uber-rich (the billionaires but not the millionaires), we should also ask ourselves why there’s been so few successful high tech start-ups etc.
I no longer know much about Italy but, from courses on industrial economics, it was specialising in low and middle added value products. In a free trading environment, it may well means they’re suffering from international competition by emerging market countries.
Should we consider closing the block further to intl’ trade? When it comes to China, yes. But others, like Vietnam or Turkey or Tunisia? I’m not convinced.
So – yeah. I’d like to understand how much wealth Italy does produce, if or why that’s not enough for Italians and what’s their plans to grow their pie before forgiving “debt”/financing bridges to nowhere…
USA is doing a great job of staying 1/2 step ahead of other countries/central banks in terms of interest rates, debt and currency printing.
Sure is great to be a sovereign country.
I can answer to that. In Italy is really hard to build wealth legally. This is mostly because of high taxes and bureaucracy, but also because of lack of opportunities. The wealth is mostly concentrated on the hands of the old generations, and for the young the only chance is immigrating (I am an Italian immigrant as you may have immagined).
Regarding the products, I think that now we mostly have highly specialized industries producing high-end products (think of fashion, mechanics, food). But the problem with international competition is again mostly taxes, burocracy, and lack of investments. To give you an idea, gas is now 5 euro a gallon (it was 6 few years back) and there are not many people willing to pay 50,000 euro for a tesla.
Thanks for the answer. To a degree, I think that applies to a lot of European countries, France included. Italy just seems to have the same diseases but somewhat worse.
That said, I wouldn’t call fashion, mechanics or food high value or high tech products. They might be highly specialized (asides of commodities, what isn’t?) and they might be high end (high quality) but that doesn’t necessarily make them dynamic sectors on their own and/or having powerful multiplier effects on local activity/local employment.
NB: I am sure of nothing in what I’m saying above. I’m generally speaking a demand-sider (Keynesian, post Keynesian kind of guy) rather than a supply sider let alone an austerity tea partier but, in lots of parts of Europe, I suspect supply sided reforms might really help…
Pleased to see a mention of swapping into perpetuals. Zero coupon perps make the best sense, but I guess a fractional coupon would have to be slapped on to appease the Calvinists.