What comes next for Italy and the European Central Bank
Post-Draghi era may accelerate ECB use of anti-fragmentation tool
Mario Draghi may stay on as Italy’s caretaker premier until early elections in September, but then all bets are off, including on the European Central Bank’s firing of its brand-new weapon, carefully named to avoid spooking markets even further. We’ll bring you up to speed with what ECB chief Christine Lagarde had to say (or rather, not say) about the situation in Rome.
Governments in Europe were relieved yesterday that the flow of Russian gas through Nord Stream 1 has resumed, but there were also some indications that the pipeline is still not operating at full capacity. More good news could emerge from Turkey today, where a grain transit deal between Russia and Ukraine is expected to be signed.
In sanctions news, I’ll bring you the latest on the round of restrictions (don’t call it a package) formally adopted yesterday, including a ban on gold and jewels.
And on the Brexit front, Brussels is set to start more legal action against London as it responds to the Northern Ireland Protocol Bill.
Lagarde walks the line
Christine Lagarde managed to avoid mentioning Italy by name in her press conference yesterday, but there was little doubt how heavily events in Rome are hanging over the euro area, writes Sam Fleming in Brussels.
The European Central Bank’s president unveiled not only a half-point rate increase, but she teed up a brand-new bond-buying programme which will be aimed at countering any disorderly surges in the cost of borrowing for the region’s more vulnerable governments.
This “Transmission Protection Instrument” would, she stressed, be available to any euro area country that meets the ECB’s criteria.
The country that looks most vulnerable right now is undoubtedly Italy, which is preparing for snap elections after three parties boycotted a vote of confidence in prime minister Mario Draghi, prompting him to tender his resignation.
Having won plaudits for its efforts under Draghi to push through wide-ranging economic and legal reforms and keep cut public finances on a sustainable trajectory, Italy is now facing a period of extreme political uncertainty which will cast serious doubts on its ability to maintain fiscal discipline and stick to its commitments.
On the face of it, the tool put forward by the ECB has landed at the nick of time, given the risk of a major loss of confidence in bond markets as Rome descends back into internecine political infighting.
The central bank is, after all, handing itself some genuinely impressive firepower, given there are no upfront limits to the scale of bond purchases that the ECB will conduct if there are “unwarranted, disorderly” movements in a country’s bond yields.
The ECB has also given itself a pretty free hand when it comes to deciding whether to act. The central bank set out a number of criteria, including that the country in question is sticking to the EU’s fiscal rules and its recovery plan targets, but these are mere “inputs” into the ECB’s decision-making.
The ECB will, however, have to tread an enormously delicate path as it decides when, and if, to intervene in Italy’s bond markets. Some difficult choices may not be that far off, given the yield on Italy’s 10-year government bond yesterday rose as much as 0.27 percentage points to almost 3.7 per cent.
Getting all 25 governing council members on board behind the bond-buying scheme was far from easy, given the scepticism in northern member states such as Germany and Austria about innovations that even hint at bailing out imprudent fiscal authorities.
The ECB cannot afford to allow its new crisis-fighting instrument to appear to be a free lunch that shields policymakers in Italy — or elsewhere — from self-inflicted economic wounds. Events in Italy in the coming weeks will provide an immediate test of the central bank’s resolve.
Wear your bling
The EU yesterday adopted its so-called maintenance and compliance package of sanctions in response to Russia’s war in Ukraine, which now also covers gold, including jewellery. But if you happen to have a Russian brooch on you when travelling, that’s OK, say EU officials familiar with the matter.
The inclusion of jewellery in this latest round of restrictive measures (that do not amount to a proper sanctions package, as we wrote here) was the only mildly contested issue. “In the end, jewels were included, but there are exceptions on personal use,” one official said.
The EU sanctions regime was expanded to 50 additional areas, mainly to align with restrictions already put in place by the US and the UK, covering €400mn worth of prewar trade. These areas range from police helmets, batons and chemicals used for tear gas to nuclear technology and fracking.
On the “maintenance” side, there was some tightening of exemptions, for instance by adding a handful of entities that work with the Russian military in the fields of aeronautics, space and naval. The ban on Russian ships docking in EU ports has also been extended after ships were circumventing it by offloading their cargo at sea, in locks which were off the coast of EU states. The ban now applies to such practices, too.
Following the recent German model of passing a law obliging listed persons to declare their assets, the EU has introduced similar obligations for sanctioned persons to indicate what possessions they have in the bloc. Failure to comply can lead to their assets being confiscated rather than just frozen. “If they are frozen, at some point they can be de-frozen. If they are confiscated, they are gone, so this is an incentive to self-report,” said another EU official.
Trading with Russia’s largest bank, Sberbank, is now also banned (in addition to it having been previously kicked off the international messaging system Swift). One exemption that has been clarified for Sberbank and all the other Russian banks is for payments relating to food imports and fertilisers.
On the question of whether the sanctions regime is aggravating a food supply crisis in low-income countries, EU officials were quite defensive. “We have very systematically checked with practically every single developing country concerned, where potential issues could lie. Responses were underwhelming,” insisted a third official.
