The European Central Bank announced during an emergency meeting on Wednesday that it would be taking additional steps to prevent fragmentation of the Eurozone as interest rates rise to combat inflation.
"The pandemic has left lasting vulnerabilities in the euro area economy, which are indeed contributing to the uneven transmission of the normalisation of our monetary policy across jurisdictions," the ECB wrote in a press release. "Based on this assessment, the Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism, a precondition for the ECB to be able to deliver on its price stability mandate."
The ECB's plan to reinvest bond redemptions will shunt proceeds from German bonds to the bonds of countries in
need of debt relief. While this can help reduce fragmentation, it doesn't fully address the Eurozone's issues.
Like the Federal Reserve, the ECB faces a tough battle in combating inflation. While the Fed's planned rate hikes will inevitably put it in a precarious position, the American central bank at least deals with a single client. The ECB, however, must address the needs of multiple nations, and as the past has proven, a single monetary policy for 19 countries is a slippery slope.
The inflation crisis currently pressuring consumers and governments worldwide isn't quite as dire as the sovereign debt crisis in 2011, but the painful memories of the Eurozone's existential nightmare still keep many Europeans on edge. The disparity in effects felt by each E.U. member, as the ECB mentioned, is the "fragmentation" that many experts have voiced concerns over.
The sovereign debt crisis illustrated the difficulties of a single monetary policy for 19 individual economies, though despite the progress the ECB has made since then, the same issues are arising once more. While making considerable progress reducing and managing its debt, Greece's 10-year bond rates hit 4.43% on Monday, while Italian bonds hit 4% for the first time since 2014. However, where the true extent of fragmentation becomes apparent is economic growth; due to Italy's low economic growth, even the ECB's decision to hike interest rates won't address the country's problems.
Italy isn't the only "peripheral" European country facing debt issues that the ECB's rate hike won't address, though its potential to become a significant problem for the E.U. is relatively high. In the sovereign debt crisis, notoriously stiff austerity measures were used to shore up the crumbling economies of severely indebted E.U. members. At the moment, however, austerity appears off the table, largely thanks to significant improvements made to European monetary policy since 2011.