A decade of 'whatever it takes'

July 27, 2022 10:31
Photo: Reuters

This month marks an important anniversary. On July 26, 2012, the European Central Bank’s relatively new president, Mario Draghi, famously declared that, “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” It was a brilliant (and apparently ad-libbed) move, furnishing Draghi with his well-deserved reputation as the savior of the euro.

Just five days before this month’s anniversary, the ECB announced another potentially game-changing move. With its new Transmission Protection Instrument (TPI), it will seek to reduce the spreads between member-state government bonds in cases where yields are being driven up by market pressure or speculation, rather than by fundamental problems of economic sustainability. Coincidentally, Draghi resigned as Italy’s prime minister on the same day.

In July 2012, the ECB sought to circumvent a key question: What conditions should a central bank impose when it purchases government debt? Should an unelected institution with a mandate to ensure price stability also decide which national governments and enterprises will receive funding? These questions have weighed on the minds of critics who worry that the ECB is blurring the distinction between fiscal and monetary policymaking.

But imposing strict conditions on governments is also risky, because it is effectively an act of humiliation. A government that is seen to be submitting to a supranational agency can easily lose legitimacy. The word “kowtow” offers a clue as to why: The term, anglicized from the Chinese, refers to a ritual of deep obeisance that has strong associations with colonial history.

Nineteenth-century imperial powers regularly imposed burdensome obligations on their colonies and created comprehensive systems to monitor whether they were being met. Classic examples were the Western-run Chinese customs administration and the revenue-collection processes that Britain and France imposed on the Ottoman Empire under the Dette Ottomane (Ottoman Public Debt Administration).

Today, Italy remains at the heart of the long eurozone debt crisis, owing to a combination of its large size, high liabilities, and near-complete absence of growth. When the euro crisis began in Greece in 2010, it could have been dealt with swiftly through debt rescheduling or restructuring. But this was not done, because policymakers wanted to avoid contagion among much larger eurozone economies that also had high levels of debt – namely, Italy.

At the 2011 G20 summit in Cannes, US President Barack Obama pressed for Italy to submit to a formal program with the International Monetary Fund or European Union institutions to ensure that it was following through with policies to make its debt burden sustainable. But Italy’s new, widely respected technocratic prime minister, Mario Monti, fiercely resisted this demand, because he wanted to demonstrate that Italy was mature enough to deal with complex reforms on its own.

The genius of Draghi’s 2012 solution lay in the ECB’s oddly named Outright Monetary Transactions (OMT) program, which could effectively impose certain conditions on member states without ever being deployed. Critics joked that not a word of the program’s name made sense: the support was indirect and fiscal, rather than outright and monetary; and, in the end, no transactions ever took place. Nonetheless, the OMT held out the possibility that highly conditional support could be offered in the event of an emergency. Conditionality thus existed as an implicit, rather than formal, feature of the eurozone framework.

Low interest rates solidified this suspension of formal conditionality and made it appear brilliantly successful. Then came COVID-19, which hit Italy earlier and harder than any other European country. And, unlike in past crises, neither the Italian government nor any past policy failures could be blamed. COVID-19 and the push for a European “green recovery” created an opportunity for new policies built around a central EU budget and new fiscal resources.

Receiving EU recovery funds became a top priority for Italy, setting the stage for Draghi’s ascent as the technocratic prime minister of an emergency government of national unity in February 2021. All of Italy’s major political parties supported Draghi’s government, expecting that it would secure access to the sorely needed funds.

But such a broad coalition could not fail to be fragile, and some coalition members seized on elements of conditionality when they reappeared. It seemed like a blow to national self-esteem that Italy should deregulate its taxis and beach clubs (bagnos) to comply with EU competition policies.

The TPI will make life more difficult for any new Italian government, because it means that conditionality can no longer be fudged. Judging by the eligibility criteria that the ECB lists in its July 21 press release, there simply are no circumstances in which the TPI can be deployed to manage the fallout from non-economic developments like the breakdown of a coalition agreement. Moreover, this means that when Italians go to the polls in September to elect a new government, they will have a vexing choice, because a right-wing successor government is unlikely to have any room for maneuver.

There is a reason why right-wing politicians like Giorgia Meloni of the Brothers of Italy and Matteo Salvini of the League have been frantically dialing back some of their past criticism of the euro and the EU. They recognize that an open break with the EU would be economically cataclysmic. If they do find themselves in the next government, they will feel the pressure to accept whatever conditions the EU sets, while insisting to their voters that their hands are tied.

But now that the TPI has been introduced, this argument will no longer fly, because it will revive the old dynamic in which blaming external powers merely invites a search for new options to take back control. Russian President Vladimir Putin doubtless would enjoy every moment of watching these political impulses tear Europe apart once again.

In the longer run, Europe will need a more formal program that operates through intergovernmental, rather than monetary, institutions. This could be done by assigning a greater role to the European Stability Mechanism; but the core of a reform would need not simply more fiscal integration, but also more precise and transparent rules on how it might be achieved.

Either way, the point would be to bypass the ECB and end the decade-long experiment of pretending that there is no conditionality involved in keeping the eurozone’s diverse members together. Obviously, any such program would need member states’ explicit political consent. If it relies on more fudging, it will be little different from what came before.

Copyright: Project Syndicate
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Professor of History at Princeton University and a senior fellow at the Center for International Governance Innovation.