Party politics and monetary decisions share few things, but they do have a taste for repetitive messages in common. It is about generating expectations and credibility. That’s where central bankers are in these difficult days. Among others, there are two very repeated messages. One is common to the United States and the eurozone and has been repeated these days in Barcelona by James Bullard, president of the Federal Reserve Bank of St. Louis: a soft landing is necessary and still possible instead of facing a severe recession. The other message is being reiterated like a mantra by various ECB officials, because it refers to a problem specific to the eurozone: the risk of fragmentation in financing conditions.
That it can be landed softly is something that we are still far from being able to guarantee today. Inflation has stuck to the economy like pesky gum on the shoe. A single hand will not be enough to remove that rubber, several combined and patient efforts must be made. And not just central banks. This Monday, the president of the ECB, Christine Lagarde warned in the European Parliament of the difficulty of the mission due to the rise in wages and its possible consequences on inflation.
In the eurozone, financial fragmentation is not a trivial risk. It is a serious source of uncertainty that Draghi managed to silence with his whatever it takes and later it materialized in a banking union that has not been completely closed, but that has helped to significantly reduce the problems that arise when financial stress appears in the weakest nations in the area. It also tends to spread like a reputational stain and affects ratings throughout the affected country. The cost of debt rises for everyone, including businesses. A problem that has now returned with the horizon of interest rate hikes and a notable reduction in bond purchases that the ECB knows that it cannot easily tackle in the current context.
It has already caused a reaction in Germany, where its finance minister warned that you can’t always look at southern Europe. An open and explicit request to reduce sovereign debt purchases that some understand as close to the monetization of deficits. It happened after the emergency meeting of the ECB last week to announce some mechanism to replace the one that is now being lost in the purchase of sovereign bonds. As technical as it sounds, it is a crucial issue.
Yesterday, Lagarde in her appearance before the European Parliament did not advance significant details of this new mechanism, but she left a message that combined hope and concern: “The fight against fragmentation is conditional on the success of monetary policy, which must prevent this risk of segmentation of financial markets. However, it will not be easy to move forward without some kind of conditionality – even if it is Lightsubject to reforms and the reduction of fiscal imbalances―, a concept with a lot of stigma and the displeasure of many politicians due to the electoral cost.
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