The necessary interest rate hikes by the ECB are a particular burden for highly indebted countries such as Italy and Portugal. That is why they want to provide them with a new instrument in case of an emergency.
The threat has a name. Experts call it “spreads”. That’s the difference between the interest rates that governments have to pay when they issue bonds to fund them. Germany (and also Austria) have a high credit rating, which means that they have to offer, for example, 1-1.5% for a ten-year bond.
In Italy, on the other hand, it is four percent, followed by Greece, Portugal and France. In the euro crisis of 2008, the “spreads” were a multiple of this. There was a risk that the eurozone would collapse because some states could no longer pay the interest on their debts.
“Problems shifted to the future”
It was only when the ECB intervened (Mario Draghi, then head of the central bank, famously said “whatever it takes”) that speculation in the financial markets stopped and spreads narrowed again. The pressure on states to get their budgets in order and curb debt increased. The ECB helped with its zero-interest policy.
“But the truth is that the problems have shifted into the future because no real structural reforms have been made,” said economist Christian Helmenstein, who has criticized the problem children in the eurozone.
With Corona, frugal households were gone everywhere. Then came the war in Ukraine, the explosion of energy prices and record inflation. That’s why interest rates must go up, “that’s essential,” says Helmenstein. However, he believes that the ECB reacted too late. Because the interest rate differential with the US led to a devaluation of the euro against the dollar by 14%. As a result, energy imports became more expensive and with it inflation.
Fear of new euro crisis
The interest rate hikes are now putting heavily indebted countries (see chart) in trouble. Italy in particular is seen as a problem child because of the unstable government and the enormous economic problems. Spreads are widening again and some see a new euro crisis emerging.
To prevent this, the ECB is launching a new anti-crisis program, the so-called Transmission Protection Instrument (TPI). “The ECB is trying to achieve two goals at the same time that are incompatible,” says Helmenstein: on the one hand, it wants to maintain purchasing power through price stability (low inflation). On the other hand, it wants – which is not actually its task – to maintain the financing of the national debt.
Source: Krone
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
