Last month marked a significant anniversary. On July 26, 2012, the relatively new President of the European Central Bank, Mario Draghi, declared that “the ECB is ready to do whatever it takes to preserve the euro. And believe me, that will be enough. It was a brilliant (and apparently improvised) decision, which gave Draghi his well-deserved reputation as the savior of the euro.
But just five days before the anniversary, the ECB announced another potentially game-changing decision. With its new Transmission Protection Instrument (TPI), it will seek to reduce spreads between Member States’ government bonds in cases where yields are driven up by market pressure or speculation, rather than by fundamental problems of economic sustainability. Coincidentally, Draghi resigned as Italian 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 buying public debt? Should an unelected institution with a mandate to ensure price stability also decide which national governments and companies will receive funding? These questions have weighed on the minds of critics who fear the ECB is blurring the line between fiscal and monetary policy.
But imposing strict conditions on governments is also risky, as it is in fact an act of humiliation. A government perceived as subject to a supranational agency can easily lose its legitimacy. The word “to prostrate” offers a clue as to why: the term, anglicized from Chinese, refers to a ritual of deep obedience that has strong associations with colonial history.
The imperial powers of the 19th century routinely imposed heavy obligations on their colonies and created comprehensive systems to check whether they were being met. Classic examples were the Western-led 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-running Eurozone debt crisis, due to its large size, high liabilities and near-total lack of growth. When the euro crisis erupted in Greece in 2010, it could have been resolved quickly by debt rescheduling or restructuring. But that was not done as policymakers wanted to avoid contagion between much larger eurozone economies that also had high debt levels, namely Italy.
During the G20 summit in Cannes in 2011, US President Barack Obama pushed for Italy to submit to a formal program with the International Monetary Fund or European Union institutions to ensure it followed. policies to make its debt burden sustainable. But the new technocratic Italian Prime Minister, Mario Monti, fiercely resisted this request, because he wanted to demonstrate that Italy was mature enough to manage complex reforms on its own.
The genius of Draghi’s solution in 2012 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 one word of the program’s name made sense: the support was indirect and fiscal, rather than absolute and monetary; and, in the end, no transaction ever took place. Nevertheless, the UNWTO has retained the possibility that highly conditional support may be offered in the event of an emergency. Conditionality therefore existed as an implicit, rather than formal, feature of the euro area framework.
Low interest rates solidified this suspension of formal conditionality and made it look brilliantly successful. Then came Covid-19, which hit Italy earlier and harder than any other European country. And, unlike past crises, neither the Italian government nor past policy failures could be blamed. Covid-19 and the push for a European “green recovery” have created an opportunity for new policies built around a central EU budget and new fiscal resources.
Receiving recovery funds from the EU has become a top priority for Italy, paving the way for Draghi’s ascension as technocratic prime minister of an emergency government of national unity in February 2021. All Italy’s main political parties have backed Draghi’s government, expecting it to guarantee access to badly needed funds.
But such a large coalition was bound to be fragile, and some coalition members seized on elements of conditionality when they reappeared. It seemed to be a blow to national self-esteem that Italy would have to deregulate its taxis and beach clubs (bagnos) to comply with EU competition policies.
The TPI will make life harder for any new Italian government, as it means conditionality can no longer be rigged. Judging by the eligibility criteria the ECB lists in its July 21 press release, there are simply no circumstances in which the TPI can be deployed to manage the fallout from non-economic developments like the breakdown of a coalition agreement. What’s more, it means that when Italians go to the polls in September to elect a new government, they will have a tough choice, as a right-wing successor government is unlikely to have room to manoeuvre.
There’s a reason right-wing politicians like Giorgia Meloni of the Brothers of Italy and Matteo Salvini of the League have frantically recalled some of their past criticisms of the euro and the EU. They recognize that an open break with the EU would be economically cataclysmic. If they find themselves in the next government, they will feel the pressure to accept all the conditions set by the EU, while insisting to their constituents that their hands are tied.
But now that the ICT has been introduced, this argument will no longer hold, as it will rekindle the old dynamic in which blaming external powers simply invites one to seek new options for regaining control. Russian President Vladimir Putin would no doubt relish every moment of watching these political impulses tear Europe apart once again.
In the longer term, Europe will need a more formal program working through intergovernmental rather than monetary institutions. This could be done by giving a greater role to the European Stability Mechanism; but the heart of a reform would require not only greater fiscal integration, but also more precise and transparent rules on how it could be achieved.
Either way, the aim would be to circumvent the ECB and end the decade-long experiment of pretending that there is no conditionality involved in keeping the various eurozone members together. . Obviously, such a program would require the explicit political consent of Member States. If he relies on more special effects, it will be a little different from what happened before. — Project syndicate
• Harold James, professor of history and international affairs at Princeton University, is the author of The War of Words: A Glossary of Globalization.