Pascal Blanqué, Chairman of the Amundi Institute and former Chief Investment Officer at Amundi, on Thursday said he believes that market thinking behind widening spreads among eurozone government bond yields poses a risk of becoming a self-fulfilling prophecy.
Speaking to journalists at the 2022 Amundi World Investment Forum in Paris, Blanqué said he is concerned that the ECB is not doing the right thing when it comes to managing the spreads. The spreads are seen as a vulnerability in the eurozone because they reflect the differences in the way member countries manage their budgets.
Italy, whose national debt is about 150 percent of its GDP, should be able to manage its state debt, he said, but he noted that this is not the view of investors when they start trading the spreads.
ECB needs to convince investors
“What worried me at this point, this is probably my main worry about the ECB, is that in order to actually convince investors that the spread will remain low, you have to convince them that you will do whatever it takes, which is an expression which was used earlier by somebody else at ECB, but it’s very well known,” he said, referring to the well-known earlier statement by former ECB President Mario Draghi.
The difference in yield between 10-year government bonds for Germany and Italy widened to above 200 basis points just ahead of Thursday’s ECB meeting in Amsterdam and increased slightly further after the ECB announced its rate decision. Spreads between Bunds and Greek and Spanish government bonds also have widened further in recent days.
Widening spreads could put a strain on cooperation within the European Union because they impose a heavier interest burden on countries with higher national debts, especially in an environment where interest rates are rising.
“The ECB doesn’t have a process to actually intervene sufficiently in let’s say the Italian market or the Spanish market. Avoiding these self-fulfilling, multiple equilibria I suspect is going to be an issue that is going to be on the table for the next year.,” Blanqué said.
Eurozone faces slowdown, with or without ECB
Olivier Blanchard, French economist and senior fellow at the Peterson Institute for International Economics, and former chief economist at the IMF between 2008 and 2015, said he sees two scenarios for the European economy, both which project a slowdown.
“The first one is that the ECB has to increase rates, but I would expect it to increase rates much less than the Fed,” he said. “And the other is that the economy comes to a halt, or at least slows down without the ECB having to do anything because of the high uncertainty due to the war in Ukraine on consumption and investment. And then the loss of real income, which is having potentially a major effect on consumption. So, again, the two scenarios that I see in Europe both have a slowdown.”
Blanchard said the challenge for the Federal Reserve is significantly larger than that for the ECB because the labour market in Europe is not as overheated as it is in the US.
“What is very clear is that you cannot slow down inflation in the US without slowing down the economy,” said Blanchard. ”Ideally, you want to slow the economy so that the growth rate remains positive at less than the nominal. And if you play it just right, then you succeed. Playing it just right is extremely hard. We really have not a good sense of how much policy works in the current environment.”
Amundi’s World Investment Forum in Paris is a two-day event that brings together about 500 investment professionals from across the world. With assets under management of approximately 2,000 billion euro, Amundi is Europe’s biggest asset manager .