Last week, the European Central Bank raised interest rates unexpectedly, which brought a lot of shock to Europe's highly indebted countries. Although the European Central Bank has made preparations for this, if the countries concerned cannot effectively deal with the debt problem, then Europe's response to the crisis may fall into a vicious circle of "relieving headaches and pains".

 

On July 21, the European Central Bank held a monetary policy meeting and announced that it will implement the first interest rate hike since 2011 from July 27, raising the main refinancing rate, marginal lending rate and deposit mechanism interest rate in the euro area by 50 basis points, respectively. 0.5%, 0.75% and 0, the euro area deposit mechanism interest rate ended the negative interest rate since June 2014. Since the European Central Bank announced in early June that it plans to raise interest rates by 25 basis points in July, the ECB's interest rate adjustment is considered to exceed market expectations.

 

The European interest rate hike "boots" landed, and the financing costs of euro area countries rose. The ultra-low interest rates in Europe for many years have provided favorable conditions for Europe to get out of the debt crisis, but it has also caused the debt level of some European countries to remain high. Today, the national debt in the euro zone has exceeded 12 trillion euros. 

 

After Europe enters the interest rate hike cycle, rising financing costs will lead to a wider spread of bond yields in some member states, which will bring trouble to European countries with high debt levels and slow economic growth.

 

Such is the situation in Italy. On July 14, Draghi believed that the foundation of trust underpinning the ruling coalition no longer existed as the ruling partner "Five Star Movement" party refused to support the Draghi government's 26 billion euro bailout plan to help people cope with rising energy and living costs. , submitted his resignation to the president but was not approved. 

 

On July 20, the Italian Senate held a vote of confidence in the government. Members of the three main parties of the ruling coalition were absent, and internal differences intensified. On July 21, just hours before the European Central Bank announced a rate hike, Italian President Mattarella accepted Prime Minister Draghi's resignation.

 

Some analysts pointed out that the Italian economy has been experiencing sluggish growth since the European debt crisis. In recent years, it has been hit by the new crown pneumonia epidemic and high inflation. According to incomplete statistics, Italian government debt has exceeded 150% of its GDP. After raising interest rates, it will be more difficult for Italy to borrow from European financial markets. 

 

Before the European Central Bank raised interest rates, the yield on Italy's 10-year government bond exceeded 4% in mid-June, and the spread with Germany's benchmark 10-year government bond widened to 2.4%, arousing market concerns about the renewed European debt crisis.

 

Italy is not the only European country with low growth rate and high debt. The situation in Greece, Spain, Portugal and even France is not optimistic. In order to appease investors' fears of the re-emergence of the European debt crisis, the European Central Bank raised interest rates on the 21st and launched an anti-financial fragmentation tool called "TPI (Transmission Protection Instrument)" to ensure that when a certain euro area When the risk premium of national government bond yields rises sharply, the European Central Bank can use this tool to buy the country's bonds to prevent soaring financing costs from triggering a debt crisis. However, the practical utility of this tool remains to be verified.

 

How should European highly indebted countries respond to interest rate hikes? In the short term, a bailout plan similar to the one proposed by the Italian government of Draghi is not an emergency. However, the debt problem has accumulated over a long period of time. In particular, after the establishment of the euro area, the problem of monetary unification but fiscal disunity has not been resolved. 

 

Coupled with the lack of in-depth structural reforms in some countries, the deteriorating trend of public debt has not been resolved. fundamentally reversed. The long-term accumulation of debt has caused serious imbalances in the economic systems of the countries concerned, which has further increased the difficulty of solving the problem.

 

The key, therefore, is to advance effective structural reforms to drive down deficits and drive sustainable economic growth, thus creating a virtuous circle between improving public finances and sustainable economic growth. On the one hand, it requires the relevant European countries to form a consensus on supporting the government to promote reform, on the other hand, it also needs to promote the European integration process and form external conditions conducive to reform. 

 

However, this is not an easy task for Europe at the moment. From this point of view, as the former president of the European Central Bank, Draghi chose to leave before the European Central Bank raised interest rates.