The threat of a fractured Europe is rising as old ghosts emerge | Stephen Bartholomeusz
. With inflation above 8 per cent the ECB has no option but to raise interest rates and end its bond-buying. Its president, Christine Lagarde, has said there will be a rate rise at the next ECB meeting next month and that the QE program will end on July 1.
In the 2010-11 period there was a very real threat that a heavily-indebted Greece would be forced out, or choose to exit, the eurozone. It took several attempts until it was eventually bailed out by a coalition of the International Monetary Fund, the ECB, other eurozone economies and private investors.
The surge in inflation in Europe and the response it dictates from the ECB is highlighting and exacerbating flaws in the European Project. The yields on Italian and Greek government bonds in debt markets are already rising rapidly. Yields on Italy’s 10-year bonds were around 1.2 per cent at the start of this year but are now above 4 per cent. Greek government bonds had yields of about 1.3 per cent at the start of the year but now yield 4.7 per cent.
The keenly-watched relationships between the yields on Greek and Italian bonds and those of Germany’s are trending in the wrong direction. Lagarde is conscious of the threat even as she has committed the ECB to ending QE and raising eurozone interest rates at each of the next two meetings. She has indicated there will be a 25 basis point increase next month and potentially a bigger increase in September.
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