Financial TimesFinancial Times

European economy: Lagarde wrestles with an ‘impossible situation’

By Sam Fleming, Martin Arnold

19 Jul 2022 · 10 min read

The last time the European Central Bank raised interest rates in 2011 it was forced to reverse the move within months as the eurozone was plunged into a wrenching debt crisis. The market panic that followed only subsided after Mario Draghi, then head of the ECB, declared it would do “whatever it takes” to save the euro. Fears of a similar outcome are front of mind for many as current president Christine Lagarde prepares the ECB’s first rate rise in 11 years. The move, to be announced on Thursday, will come alongside a new bond-buying plan that the central bank hopes will prevent rising borrowing costs from sparking another eurozone debt meltdown.

Draghi, who left the ECB in 2019 and became the Italian prime minister last year, seems bound to play a pivotal role once more as he prepares to address parliament in Rome on Wednesday, only days after his ruling coalition splintered. This has fuelled speculation about an early Italian election this year, which could shake investors’ confidence in the country’s ability to manage its swollen public debt that now stands at more than 150 per cent of gross domestic product.

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