MNI: Italy Meets Criteria For ECB's New Crisis Tool - Sources

The European Central Bank’s new Transmission Protection Instrument marks a break with the punitive approach taken in the past by European authorities to countries struggling with debt problems, two Italian government officials told MNI, adding that Italy meets the four criteria to be eligible for assistance under the facility should that be necessary.

In order to qualify for TPI assistance, a country has to be compliant with European Union fiscal frameworks, be free of severe macroeconomic imbalances, and have sustainable public finances and sound economic policies, conditions which the sources indicated were satisfactory to Italy, and which differ from the tougher requirements, including signing up for a European Stability Mechanism Programme, imposed by the ECB’s Outright Monetary Transactions facility.

The TPI, which would be deployed to buoy eurozone member states’ bonds if spreads diverge from economic fundamentals and is likely to be used at some point, completes the toolkit for the ECB, following the creation under its then president and current Italian Prime Minister Mario Draghi in 2012 of the OMT, whose unlimited firepower has proven such a deterrent that it has never had to be used, the sources said.

The new tool is a sign that the European Union has changed its approach towards financially weaker countries since the debt crisis, said the sources, who are close to Italy’s economic policy making.

“Compared to ten years ago, there is a new air in Europe, which appears to be more equipped than in the past to face economic and financial crises,” one source said. “The mistakes of the past cannot be repeated.”

PAST APPROACH "PUNITIVE"

The sources pointed to what one called the “punitive attitude” taken towards Greece as its economy entered crisis, adding that this had “echoed the sad experience of conditional financing by the IMF to developing countries.”

The difference in approach seen with the TPI partly derives from the pandemic’s legacy of significant additional indebtedness even for the healthiest eurozone economies, reducing the differences between member states’ fiscal positions, one of the officials said, adding that the focus of investors is shifting towards the ability of Europe to “act together as a bloc” and away from individual countries.

While aspects of the TPI have yet to be clarified, some of the conditions are based on Stability and Growth Pact rules on government borrowing which were eventually likely to be relaxed, one of the sources noted.

As Italy heads for Sept. 25 elections which polls suggest might result in a government led by the far-right Brothers of Italy, the officials noted that the ECB and EU authorities will not be more demanding of a new government simply because of its ideological orientation but that much of the bloc’s new financial architecture, like the NextGenerationEU pandemic recovery package as well as the TPI rely on mutual trust.

“It is wise to respect the rules that we ourselves have helped to define,” one official said.

Draghi, who is continuing as caretaker until the appointment of a new prime minister, following the implosion of his coalition earlier this month, has been arguing strongly for Italian governments to commit to engaging with European institutions. (See MNI: Draghi To Push Through Court Reform, Start Budget-Aides)

“In that sense, the Draghi agenda has transmitted something to our country,” said one of the officials, adding that several of Italy’s main political parties are now claiming to be the inheritors of his technocratic policies.

Italy’s next government should act “with confidence, seriousness and awareness that Europe is our true insurance for the future,” one of the officials said.