Your op-ed (“War Leaves Central Banks With Tough Choices”, FT View, March 15) dealing with central banks’ nasty policy options fails to mention how seriously the European Central Bank’s policy space is limited by the very poor state of Italian public finance.
As a result of the pandemic, Italy’s economy faltered, its budget deficit exploded and its public debt-to-gross domestic product ratio hit a record 155%. This level of debt is about 25 percentage points higher than it was at the time of Italy’s sovereign debt crisis in 2012.
Over the past two years, despite the poor state of its public finances, Italy has been kept afloat by the fact that the ECB has bought 250 billion euros of Italian government bonds as part of its program emergency purchase in the event of a pandemic. This purchase covered almost all of the Italian government‘s net borrowing requirements and enabled the Italian government to finance itself at interest rates not much higher than those paid by the German government.
Today’s record Eurozone inflation rate, coupled with Italy’s unsustainable level of public debt, has presented the ECB with a political dilemma. If the ECB does not tighten its monetary policy enough, it risks losing control of inflation.
Yet if he tightens monetary policy enough to deal with inflation, he risks precipitating another Eurozone debt crisis centered on Italy whose economy is about 10 times larger than that of Greece.
Senior Researcher, American Enterprise Institute, Washington, DC, USA