So she introduced the so-called Transmission Protection Instrument. The name only makes sense, if at all, to central bankers. As my colleague Marcus Ashworth has pointed out, TPI is best understood as “To Protect Italy”. Lagarde signals that the ECB will snap up the securities to stabilize their prices if Italian bond yields soar. It’s about convincing speculators not to even try. In other words, the goal is deterrence.
Stopping people from doing undesirable things — by literally or figuratively drawing red lines — is a big part of what powerful people do for a living.
Russian President Vladimir Putin, both before and after his invasion of Ukraine, explicitly told NATO and the West not to “cross his red lines.” US President Joe Biden, in turn, has warned Putin that the West would “react” if Russia used chemical or nuclear weapons.
Red lines – the term apparently dates back to a meeting a century ago when someone physically marked a map of the Middle East – appear wherever there is power and conflict. In 1950, Maoist China drew one along the 38th parallel on the Korean Peninsula and warned Americans not to cross it northbound (they did anyway). With better luck (so far), Beijing has also drawn a red line to stop Taiwan from declaring independence under threat of invasion of the mainland. In 1979, the US, for its part, scribbled somewhat vaguely magenta to discourage China from attacking the islands.
Elsewhere in the Cold War, the superpowers drew all sorts of boundaries for each other. The Middle East is riddled with the flourishes of so many scribes that some regional maps look like Jackson Pollock paintings. Lest the metaphor become stale, Benjamin Netanyahu, a former prime minister of Israel, once drew a physical red line on a diagram of an Iranian nuclear bomb while addressing the United Nations General Assembly.
Carrying red pencils is not synonymous with coercion — that would be more of an ultimatum than a warning. It’s just a way to signal opponents to retreat or do something else. The popularity of the practice is surprising because it comes with risks.
One concerns credibility. Could and would you actually pull it off when your threshold is crossed? NATO’s Article 5 – “An attack on one is an attack on all” – is a successful red line because the alliance could and would defend any of its members. During the Cold War, the “mutually assured destruction” doctrine succeeded in deterring the use of nuclear weapons because retaliatory action seemed certain and disastrous.
In the money world, Lagarde’s predecessor at the ECB, Mario Draghi, risked all his credibility in 2012 when he calmed the first euro crisis by promising to do “whatever it takes”. It was also the code for a bond-buying program to deter speculators. Draghi won – the ECB was never forced to use him. (Unfortunately, he couldn’t repeat the trick; as Italy’s prime minister, he couldn’t use sheer force to avert the current turmoil in Rome.)
The second challenge has to do with clarity. If you draw the red line too accurately, you risk challenging the opponent to go all the way to the threshold you set. Put it on using nuclear weapons, for example, and the enemy may be encouraged to resort to the biological or some other kind.
But blur can be worse. In 2012, then-US President Barack Obama publicly told his Syrian counterpart Bashar al-Assad that “a red line for us is that we see a whole batch of chemical weapons moving or being used.”
huh? What is the red line here – movement or use? And when does a bunch become a whole bunch? To Assad, it looked more like a scribble with a pink hue. Obama was not more explicit about the “consequences” that were threatened, other than implying that they would be “enormous.”
A year later, ignoring Obama’s red line, Assad used chemical weapons and the US did not retaliate. The episode is considered a major embarrassment for American diplomacy. The lesson is this: if you can’t even define the threshold for yourself, or aren’t willing to punish crossing it, keep your marker covered.
Where does this take us in the summer of 2022 with the various red lines that have been drawn lately? Nowhere well, is the short answer.
Putin still hasn’t clarified where his red lines are. Obviously, he doesn’t want the US, NATO and the European Union to defend Ukraine. But that has only stopped the West from deploying troops and imposing a no-fly zone over Ukraine lest NATO be forced to fire directly at the Russians. However, the West is sending weapons, including large cannons, that could hit targets inside Russia. Putin runs the risk of looking weak if he moves the line further, and that makes him even more dangerous.
For his part, Biden faces the mother of all dilemmas. He obviously wants to prevent Putin from escalating into a chemical or nuclear war. But how can he define the threshold when the adversary, a notorious practitioner of “hybrid warfare,” specializes in fudge? The West would certainly retaliate one way if Putin nuked a Ukrainian city, the other way if he “just” detonated a low-yield nuclear bomb in the middle of the Black Sea to show he was serious means. Should the “consequence” in this case be a military strike? And if so, a conventional or an atomic drawing board?
The stakes are lower for Lagarde – the dissolution of the eurozone, rather than nuclear Armageddon. But she faces a similar conundrum. She did her best to set various conditions before launching the TPI – likely to placate hawks on the ECB Governing Council who are worried the bank might overstep its mandate. However, echoing Biden, she emphasized that both the decision to intervene and the extent of the response are discretionary.
Experience shows that the most effective lines of deterrence are “either red and fuzzy or pink and clear”. Lagarde’s so far is neither. This could be why bond dealers are raising their bets instead of folding. Is the red line between Italian and German bonds at 250 basis points? 300? Everyone’s guess. It looks like this is another red line being tested.
More from other authors at Bloomberg Opinion:
Europe needs a better nuclear deterrent against Putin: Andreas Kluth
ECB crisis plan does not convince bond traders: Marcus Ashworth
• China’s Choice: Covid Zero or Xi’s Three Red Lines: Shuli Ren
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Andreas Kluth is a columnist for the Bloomberg Opinion and reports on European politics. The former editor-in-chief of Handelsblatt Global and author of The Economist is the author of “Hannibal and Me”.
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