European Central Bank President Christine Lagarde said on Monday that tackling spreads between sovereign borrowing rates is at the heart of the institute’s mandate, defusing critics who believe the ECB is stepping out of its role.
The ECB defines its monetary policy for nineteen countries in the euro zone and the fight against fragmentation is a prerequisite for the proper transmission of this policy, declared Christine Lagarde during a hearing before the European Parliament. This fight against fragmentation is at the very heart of the ECB’s mandate, insisted the Frenchwoman.
The monetary institution had to react urgently last week to show its determination to counter any rate spread in the euro zone and any panic on the Italian debt.
The announcement of an upcoming rise in its key rates had set fire to the powder on the markets, with a surge in borrowing costs of the most indebted countries, especially those of Italy.
The contours of the ECB’s new anti-crisis instrument still unclear
These spreads in sovereign borrowing rates between member countries of the euro zone, called spreads, you must kill them in the bud if you do not want to let the risk of fragmentation occur and harm the transmission of monetary policy, assured Mrs Lagarde. No one should doubt our determination and our commitment, she insisted.
Because if it does not react, the ECB is not doing the job entrusted to us by the treaty, which is to guarantee price stability defined by 2% inflation, she argued.
The ECB announced last week that it was going to develop a new anti-fragmentation instrument to control the famous spreads. This initiative has put an end to the tensions on the Italian sovereign debt for the time being.
But the contours of the ECB’s new anti-crisis instrument remain unclear and it risks being the subject of criticism from those who see it as a form of monetary financing of States, prohibited by the European Treaty. A similar tool decided in response to the 2012 debt crisis was therefore attacked by German Eurosceptics before the Constitutional Court.
The president of the German economic institute ifo, Clemens Fuest, thus warned the guardians of the euro last week: the ECB wants to start helping certain member states financially by limiting interest rate spreads. This will lead to new debates on the limits of the ECB’s mandate, he said in the daily Bild.
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