In our country, even before the period of increased surveillance finally ended, a period of heightened uncertainty set in. The economic crisis faced by fragile eurozone economies (such as Italy and Greece), with rising inflation, widening bond yields (spreads) compared to their German equivalents, and lower growth rates, is a much more serious and risky business to deal with. deal only with the old instruments of monetary policy. The recent intervention by the European Central Bank is more reassuring than daunting in the long run. This sends a clear signal to the market that the ECB is here, but it is far from clear how long it will be “here”.

In particular, there is no doubt that an increase in the cost of borrowing in the national economy can cause disaster. First, the state and the banking system, and very soon the entire economy. Destruction chained. The state itself is unable to service its credit obligations and cover its needs. Rising borrowing costs lower the value of government bonds held by banks. Reducing their value is critical because it severely limits the ability of banks to borrow and, obviously, to lend. The next link in the chain is the horizontal and vertical spread of panic both in the financial markets (national and international) and among citizens. Theoretically and practically, this is where the game ends. Therefore, to avoid a zero point, the ECB needed to intervene to protect the eurozone’s most vulnerable economies. For this reason, after a sharp jump in rates on 10-year Greek bonds from 1% to 4.5% (and a corresponding increase in rates on Italian bonds), the ECB announced the activation of a new “anti-fragmentation tool” with which it will buy bonds from the countries of the South, by reinvesting funds from bond redemptions of strong economies such as Germany, France and the Netherlands. With this policy, it aims to achieve two goals at the same time: to contain the rise in borrowing costs in vulnerable countries, while the ECB can continue to raise interest rates as inflationary pressures arise.

With these measures, the tyranny of bond yield differentials has been temporarily brought under control, but fiscal stability has not been ensured for vulnerable economies like Greece’s. The reasons are many and complex. The ECB’s program could require huge capital investments, depending on the duration of the crisis. But we must not forget that the availability of funds is never unlimited. Therefore, the duration of the new program should be considered limited by definition. A return to normal inflation would also mean the end of this policy.

It also needs to be clarified that the sustainability of the Greek economy in the long run depends not only on the sustainability of its debt. It is necessary and necessary to maintain relatively high growth rates. This is not always possible. The ECB, what it gives with one hand, at least in part, takes away with the other. In the next period, and especially before the end of the year, an increase in ECB interest rates is expected as a necessary and necessary measure to curb inflation. This automatically means lower investment growth prospects. The ECB’s policy may send a signal that the safety net has been expanded, but the investor, big or small, is feeling uncertain about the future, which makes him more conservative and cautious in his actions. The result is anemic growth. Growth forecasts have been constantly revised downward in recent months.

This is an ominous sign for long-term debt reduction, as the key driver of debt reduction is GDP growth, given that the absolute amount of debt does matter, but the ratio of debt to GDP is even more important. This is where the paradox arises if significant GDP growth continues. Inflation in this case can have a beneficial effect on debt, at least in the short term. This is indeed highlighted as a possible consequence in the recent Bank of Greece Monetary Policy Report 2021-22 (June 2022) provided inflationary pressures are brought under control before fueling sustained price and wage inflation.

An increase in the cost of borrowing in the national economy can cause disaster.

Given that the economic problems are real and continually worsening, a number of European political leaders are calling for the Union to be further integrated, but there are also economic leaders, such as Germany’s central bank chief Joachim Nagel, who vehemently oppose the “anti-fragmentation tool”. During an emergency meeting of the ECB on June 15, he voiced his opposition to new policies aimed at narrowing bond yield spreads in vulnerable eurozone economies, on the logic that the cost of borrowing should be determined by the markets in order to send “real” messages to their recipients. He also stated that such a policy makes governments calm down, not realizing that they are in mortal danger of a fiscal collapse, and they must take decisive action, regardless of the level of interest rates and bond yield spreads.Of course, this also has its own logic.Also this program can represent monetary financing of governments by the central bank, which is prohibited by European treaties.

No one said that dealing with the financial crisis was easy. Vice versa. Any applied measure somewhere intersects positively, somewhere negatively intersects with the intended goal. And all this is a function of time. Will the new monetary policy tool be enough to contain our country’s borrowing costs for as long as it takes and for as long as it needs, as Mario Draghi would say? Will growth continue at levels sufficient to improve the debt-to-GDP ratio? How far is the end of the crisis as the only basic condition that will lead to the normalization of the Greek economy?

In conclusion, let’s remember what was said from Plato to Einstein that questions are more important than answers. The first is aimed at understanding the existing problem. The latter simply give an ephemeral answer, the meaning of which may be revised in the future based on new data. We have tried to give some ephemeral answers in this text, but questions, unfortunately, remain.

* Mr. Giorgos Stoumpos was Professor of Political Economy and Executive Director of the Bank of Greece.