June 29, 2022 - 3:45pm

According to several commentators, we might be on the verge of a second euro crisis, as the “spread” — the difference between Italian and German bond yields — reached its highest level since 2013, following a slow but steady rise in Italian yields. This is hardly surprising, since none of the underlying dysfunctions of the euro that led to the first euro crisis have actually been resolved.

It has been a decade since Mario Draghi put an end to the first euro crisis by pledging to do “whatever it takes to preserve the euro” — which essentially meant getting the European Central Bank (ECB) to act somewhat like a “normal” central bank, promising to act as a lender of last resort in case a member state faced insolvency.

In fact, Draghi’s famous speech fell short of “normalising” the euro. In “normal” countries — that is, countries that issue their own currency — the central bank would never dream of meddling in the government’s fiscal or economic policies. The government sets its fiscal and economic policy targets, and the central bank accommodates them, which usually means “printing” the money the government needs to fulfil its targets.

Draghi’s promise, on the other hand, came with strings attached: the ECB would intervene to save a country from insolvency only if the country signed up to a European Stability Mechanism (ESM) structural programme. This included a host of economic and social reforms (liberalisation of labour markets, reduction of labour costs, etc.) on the macroeconomic level, and cost-cutting reforms on the fiscal level. In other words: think Greece.

This exemplifies the fundamental flaw (or virtue, if you subscribe to the neoliberal point of view) of the euro: in currency-issuing nations, the central bank, as an arm of the state, is effectively dependent on government or representative institutions; governments in the euro area, in contrast, are dependent on the ECB — which throughout the years hasn’t had any qualms about using its power to impose its political agenda on democratically elected governments and even remove political leaders from office.

Observers claimed that the “unprecedented” measures put in place during the pandemic — the suspension of budgetary rules, the ECB’s launching of a massive trillion-euro bond-purchasing programme and the creation of a Europe-wide “recovery plan” known as Next Generation EU — meant that the eurozone had finally overcome these structural deficits.

This was wishful thinking. At some point central bank support was always going to be curtailed with fiscal rules restored. And thereafter, the ECB’s bond purchases would once again become conditional on governments putting their economic policies under the control of Frankfurt and Brussels.

Which brings us to today. The ECB recently announced that it would end its bond-buying programme by July, as was to be expected, and then consider raising interest rates. This immediately made markets jittery (or better: it got them salivating), causing Italian bond yields to rise. ECB officials calmed markets by announcing that they will create an “anti-fragmentation tool” in order to avert a new crisis.

This tool is largely expected to be a sort of OMT-lite mechanism — one which allows the ECB to raise interest rates and reduce its balance sheet by getting rid of the bonds of low-yield countries (i.e., Germany), while at the same continuing to buy the bonds of high-yield countries such as Italy, thus keeping the “spread” under control, but with less politically toxic conditions attached.

This, however, is easier said than done, as Northern European countries aren’t peachy about the prospect of the ECB funding Italian deficits for the foreseeable future — even though that’s the only thing that can avoid a new financial crisis, and keep the country’s social and economic powder keg from exploding. Or better, they might be willing to do so for as long as Mario Draghi is in power, but they certainly won’t be willing to support a future “populist” Right-wing government – and elections are coming. Just look at how the ECB treated Alexis Tsipras’s Left-wing government in 2015 and Italy’s Five Star-League government in 2018.

All this points to the fact that none of the underlying problems of the euro have been resolved: the cultural outlooks and economic interests of member states continue to be irreconcilable, and the fate of nations and democratically elected governments continues to be in the hands of unelected technocrats in Frankfurt and Brussels. The reality is that the euro crisis never really ended: the euro is the crisis.

Thomas Fazi is an UnHerd columnist and translator. His latest book is The Covid Consensus, co-authored with Toby Green.