FRANKFURT — Italy’s right-wing government hasn’t made a secret of its disdain for the decisions of the European Central Bank. Yet if its gripes aren’t to backfire it might want to learn a thing or two from an unlikely source: Germany.
As attacks on the ECB from Rome’s politicians and business leaders grow, there’s a sense they could become counterproductive, eroding the country’s influence on policy and drawing attention to the eurozone’s weaknesses. This is a problem because the weaknesses don’t get much bigger than hugely indebted Italy itself.
While the positions and opinions are different, the anti-ECB rhetoric is reminiscent of how Germany acted toward the central bank at the height of the debt crisis a decade ago — to its cost.
At that time Angela Merkel’s Germany was concerned over excessively accommodative and unconventional monetary policy that was seen supporting spendthrift countries. The 2023 version sees the Italians, under the populist leadership of Prime Minister Giorgia Meloni, criticizing raising interest rates in the battle against sky-high inflation.
Since the summer, the ECB has raised interest rates at the fastest pace on record as well as signaling significant further tightening ahead. The policy is set to slow growth and lift government borrowing costs.
Italy will be one of the biggest losers. Cue the backlash from ministers, businesses and the press.
Punishing Italy
“There’s a sort of underlying ideology that Europe is out to get us, that anything Europe does is a way of punishing Italy,” said Alessandro Merli, a fellow at the Johns Hopkins University in Bologna and long-term ECB watcher, pointing out that many of those in the Italian government ran an anti-Europe campaign for years while in opposition.
Meloni used her first speech in parliament to describe rate increases as “rash” and damaging for countries like her own.
Since then, senior ministers, including Deputy Prime Minister Matteo Salvini, Foreign Minister Antonio Tajani and Defense Minister Guido Crosetto, have all criticized the policies. Salvini described them as “unbelievable, baffling, worrying.” Crosetto said they were “crazy.”
Crosetto even accused the ECB of helping Russia, and called into question the central bank’s independence.
And it’s not just the politicians. Antonio Patuelli, the head of Italy’s Banking Association (ABI), has called on the ECB to review its tightening plans. Carlo Bonomi, president of the Confindustria industry union, said that the policy was too restrictive.
The criticism has been taken up by the Italian media too. “Every time she speaks, markets collapse,” one newspaper said, while another called ECB President Christine Lagarde an “enemy of Italy” who will “slaughter us in 2023.”
Beating the drum
There are plenty of people outside Italy who doubt the wisdom of the ECB’s policy path but, if any lessons can be drawn from Germany’s actions a decade ago, it’s that the constant fire from Rome may end up harming Italy more than it helps.
“This kind of criticism puts the spotlight on the fact that the euro area is still a somewhat strange animal,” said Natixis economist Dirk Schumacher. “If you keep beating the drum too much, it draws attention to these fault lines troubling the region.”
Rewind to the depths of the sovereign debt crisis and the German government was pouring scorn on the unconventional policy measures emanating from the ECB.
The complaints were polar opposites from those of Italy today, but German criticism didn’t only cost it the ECB presidency, which went to Mario Draghi instead of the initial front-runner, Bundesbank President Axel Weber, but also eroded its influence inside the institution.
Weber’s successor, Jens Weidmann, was also seen as too inflexible. Things got so bad that Draghi, the immediate predecessor of Lagarde, accused Weidmann of a nein zu Allem (“no to everything”) attitude, slamming Germans for having a “perverse angst” of inflation.
“One can only hope that Lagarde can manage this in a way that does not lead to a situation where they [Italy] become isolated as was the case with Weidmann,” Berenberg economist Holger Schmieding said.
“We have seen in the past that it is a realistic danger that you become so isolated that even those who usually have a similar point of view no longer want to support you,” he said. “This is a danger and this danger is exacerbated by the government getting involved as it, rightly or wrong, creates the impression of interference.”
Just to prove a point
If governments like Italy’s and those who share its dovish views want to get their way they probably should “just stay out of it,” Schmieding added.
Since sound economic arguments against tightening too much now give the impression of being “superimposed by a government publicly pressuring the central bank to ensure cheaper financing” this will serve only to undermine the case made by Fabio Panetta and Ignazio Visco, the Italian policymakers on the ECB’s Governing Council, he said.
The fault lines, as Schumacher put it, have seen Italian government financing costs spiral well above that of Germany in times of crisis, challenging the effectiveness of a single monetary policy and renewing doubts about the viability of the single currency.
And rather than expecting the Governing Council to reconsider its stance, “markets may wonder whether the ECB will be forced to be super hawkish to prove a point,” he said.