On Thursday, a serious event happened. Germany broke the delay and launched a 200 billion euro plan to try to deal with the consequences of the grave energy crisis that grips her. The next day, Eurostat released the Eurozone inflation figure in August: 10%. The double digit was thus reached for the first time in the history of monetary union. In Germany, the consumer price index has risen by 10.9%, never so much in some seventy years. This data, coupled with German DIYs, make the commissioner of Italy in the next months.
Towards a maxi-hike in ECB rates
It will be very difficult for the ECB to hold out for a second maxi-rate hike after the + 0.75% decided in September. And most importantly, interest rates will go higher at this point than previously thought. Although the market still does not discount stronger scenarios, by the end of the year we will almost certainly have a cost of money at 2.50%. And by the middle of next year, barring a sharp fall in European inflation, we would aim for 3.50%.
Such a strong monetary tightening will negatively impact spread. In particular, Italy has been in the crosshairs of speculation for months. The 10-year yield rose to close to 5%, only to subsequently fall back to 4.50%. Now that Germany has pushed away a European solution to the gas crisis, the outlook for our economy is deteriorating. Not to mention the risk of an alteration of competition between German and Italian industry thanks to the fact that the former will enjoy the maximum prices set by Berlin. Rome cannot follow it on this path, as it does not have sufficient fiscal margins.
Commissioning through the ECB
Markets will take notice in the coming weeks that the Italian economy may fall apart. They will bomb its government bonds, sending spreads and yields into orbit. At that point, the ECB will no longer be able to limit itself to defending the Italian sovereign market by means of purchases with the PEPP. Will have to activate the new one anti-spread shield (TPI) launched in July. It is a pity that it is strongly conditioned, discretionary and not unlimited. In other words, the members of the ECB board would ask Italy to slavishly follow the requests attached to obtaining PNRR funds and any others requested by the European Commission.
The Italian government, which already has its hands tied on the budget, will have to abide to the letter to the indications received from Frankfurt. A full-fledged commissioner, which would serve to reassure Brussels about the policies that the next center-right-led government will want to follow Giorgia Meloni. Only a united reaction from Europe would avoid the worst case scenario. The cessation of hostilities between Russia and the West, on the other hand, is no longer even feasible for the short and medium term.