European Central Bank President Christine Lagarde will soon unveil a new “anti-fragmentation” tool to control euro zone government bond yields. In doing so, she must address two key questions: how the ECB will determine that a country’s borrowing costs have reached a level unjustified by its economic situation, and what the central bank will do about it. If Lagarde has time to review the continent’s past exchange rate crises, she should refrain from being too specific.
Register now for FREE unlimited access to Reuters.comThe arrival of the euro ended the risk of exchange rate crises within the European Union. Nevertheless, the lessons remain: to avoid speculative attacks, it’s best to be vague and flexible.
on the country whose yields are rising. But then the ECB wouldn’t be able to intervene quickly to counter market turmoil.that a difference of more than 2% between German and Italian 10-year government bond yields would be unjustified. But targeting a specific number would force the ECB to act even if, for example, a new government in Rome threw fiscal restraint out of the window.
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