I’ll explain how the ECB ICT will really work and what it will mean for Italy
What changes with the ICB approved by the ECB. Giuseppe Liturri's analysis
“ The ECB has the destiny of the nations in its hands ”. So the Wall Street Journal headlined Tuesday, noting the exorbitant anomaly of a central bank called upon to play a political role. " Europe is about to be run by ECB officials ", the article adds. More specifically, the ECB, having made the activation of the new public bond purchase program (TPI) conditional on compliance with European economic governance rules, has taken on the burden of effectively imposing compliance with those rules that European political institutions have been unable to apply for nearly 10 years. In short, to remedy a dysfunctional set-up, in Frankfurt they have seen fit to introduce a further distortion. By leveraging the immense power of blackmail that can be exercised by those who hold the purse strings.
However, the article continues – 10 years after Mario Draghi's famous “whatever it takes” – Christine Lagarde's announcement does not seem to enjoy the same credibility as her predecessor. In fact, Lagarde – since the uncertain moves of March 2020, to end at the extraordinary council convened on June 15 under the pressure of the markets disappointed by the lack of clarity – seems to have lost a lot of credibility and it is likely that investors will soon go to test which is in the level of the spread beyond which it could intervene is concrete. Proof of this is that the markets reacted very coldly to Thursday's announcement, keeping the spread well over 200 points. We recall that on July 26, 2012, Draghi's words caused the spread to drop by 50 points in a few minutes from 520 to 470 points, without however announcing the adoption of any specific instrument. This new political role of the ECB – concludes the article – will soon be tested on the occasion of an "unwelcome" outcome of the upcoming Italian elections and the possible consequences on the spread.
In short, the markets make no secret of doubts about the effectiveness of the ICT, because even the Financial Times has foreshadowed in recent days a probable test of the resolve of the ECB by investors.
We confess that, at this point, we do not know who to believe because on Monday we read Lucrezia Reichlin in the Corriere della Sera praising the virtues of the ICC, attributing to it the merit of having avoided an increase in the spread on the very day of the resignation of the Draghi government. According to the professor, the ICC marks a new era in the evolution of the functioning of the eurozone. We have gone from Greek adjustment programs with a "gun aimed at the head", to shared adherence, with a spirit of solidarity, to a body of pre-agreed rules. We move from "conditionality", imposed ex post to "compliance", agreed ex ante.
We allow ourselves to object that, when we pass from dreams to reality, the explanation of the WSJ convinces us more because it is more in line with the letter and the "ratio" that emerges from the documents and official sources.
The idyllic world outlined by the Reichlin suffers the first blow because there is an impressive overlap between the eligibility criteria adopted by the ECB and those included in the infamous " annex 3" of the reformed Mes treaty , but awaiting ratification by our Parliament. In fact, the absence of an excessive deficit procedure and excessive economic imbalances (in addition to other stringent requirements) are the conditions for accessing the “light” line of credit (PCCL). The one who, for the moment, was thrown out the door by not ratifying the Mes, returned through the window thanks to the ECB. In some respects even reinforced. Furthermore, it is the ECB itself that, in the document in which it illustrates the ICT, feels the need to reiterate that the OMT program – launched by Draghi in September 2012 and never applied – is always available. We could not have imagined a better way to confess the inapplicability of the ICC. The ECB, in fact, declares that it will only intervene when the country's fundamentals are healthy and investors raise the spread without justification. But the markets would hardly attack our debt if it weren't in the odor of unsustainability, which is precisely the case when the ECB would have its hands tied. Unless you exercise the vast political discretion that is denounced by the WSJ. For any other case, there is the OMT with its inevitable ESM loan kit and adjustment program.
In short, when it rains, the ECB will be there to assess what kind of rain falls, before opening the umbrella.
In any case, whether they are adopted by the ECB or the Mes , unfortunately we always talk about those rules that have been declared by many to be harmful and pro-cyclical and are awaiting reform. What is often overlooked is that the safeguard clause, applicable until 2023, only allows Member States to temporarily deviate from the adjustment path towards the MTO, however it does not suspend the application of the Stability Pact. and Growth, nor the procedures of the European semester on tax surveillance. These procedures in May regularly produced the Country Report and Country recommendations in which the Commission explicitly states that Italy is experiencing excessive macroeconomic imbalances and does not respect the debt and deficit rule. The assessment of the opening of the excessive deficit procedure is only postponed until next autumn.
These are precisely the assessments taken as a reference by the ECB and whose negative outcome could deprive us of its purchases of securities. The Reichlin calls it "conform", we would call it blackmail, even more with an old gun.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/vi-spiego-come-funzionera-davvero-il-tpi-della-bce-e-cosa-significhera-per-litalia/ on Mon, 01 Aug 2022 05:13:37 +0000.