So if EU leaders cannot agree on eurobonds and a Hamiltonian union, they will have to let the ECB buy vast amounts of Italian debt – and do so more aggressively to push Italian yields down to zero, in Citigroup’s view – or risk an Italian revolt.
But can the ECB act as fiscal fireman? It is arguably violating EU treaty law already. A crucial case is coming up in Germany’s top court that could constrain Bundesbank participation in perennial QE. German Target2 credits in the ECB’s payments nexus are spiking towards €1 trillion and amount to quasi-fiscal transfers without democratic accountability.
Lorenzo Codogno, ex-chief economist at the Italian treasury and now at LC Macro, says the ECB has no choice. “The Bank of England is buying paper from the Treasury. The Fed is buying junk bonds. The whole world of central banking is changing and the only way out of this is to keep monetising debt, until inflation appears,” he said.
“Italy’s debt is already unsustainable. If you don’t want a default you have to do either eurobonds or let the ECB do it,” he said.
Claudio Borghi, Lega chair of the budget committee in the Camera, says the EU faces a choice: print money, or break up the euro. “Europe can’t keep kicking the can in the face of a disaster of this magnitude. How can we possibly pay €200bn this year to fund the deficit on top of €200bn in rollovers?” he said.