The ECB has a formidable new problem to solve: working out how to fight inflation and support indebted countries at the same time
Save time by listening to our audio articles as you multitask’s pledges should forestall a crisis for the time being. Yet be in no doubt, in the long run simply depending on the central bank to underwrite the debts of the euro zone’s governments leaves the currency union intolerably fragile.
Having spent $2trn supporting its economies through the pandemic, Europe is more indebted than it was a decade ago. Italy, the bloc’s third-largest economy, has towering net debts worth nearly 140% of its, up from 108% at the start of the previous euro crisis in 2010. France’s balance-sheet looks almost as dodgy as Italy’s did after the global financial crisis. High inflation will ease the burden somewhat this year.
Should interest rates surge, the euro area would look dangerously frail. The only way to make it safe is fiscal and financial integration that relieves the burden on the” running between indebted sovereigns and the local banks that own their debt—a project that has seen some progress. Yet even if Italy’s banks could withstand an Italian default, European policymakers would never countenance throwing a €2trn bond market to the wolves.
And the only fix is more collective spending by the euro zone countries. The €750bn “Next Generation” fund, born during the pandemic and financed by joint borrowing, is already doling out cash, which should reduce pressure on national budgets. The more spending is centralised, the easier it will be for indebted states to run the surpluses that may be necessary for their debts to be sustainable if interest rates rise. Many in Europe will not like the transfers from north to south that result.