How fighting inflation could imperil the euro zone

Is the euro area entering another sovereign-debt crisis? Indebted Italy must pay 1.9 percentage points more than Germany to borrow for ten years, nearly double the spread at the start of 2021. The borrowing costs of Spain, Portugal and even France are up sharply, too—and spreads were even higher before the European Central Bank promised on June 15th and 16th to turn the tide. As in the nightmares of 2012, the central bank is working on a plan for bond-buying to prevent weak countries from spiralling towards default. Echoing Mario Draghi’s promise to do “whatever it takes” to save the euro area, Christine Lagarde, president of the ecb, warned on June 20th that anyone doubting the central bank’s resolve would be “making a big mistake”.

The ecb’s pledges should forestall a crisis for the time being. Yet be in no doubt, in the long run simply depending on the central bank to underwrite the debts of the euro zone’s governments leaves the currency union intolerably fragile.