New ECB Role: Governor of the Bank of Italy.

Prior to the European Central Bank's 75-basis-point hike in short-term interest rates, President Christine Lagarde is under heavy criticism from ECB hawks and outside academics for running essentially the "European Central Bank of Italy."

Critics said that recent data covering the ECB's sovereign bond purchases indicated that the country distribution of such purchases in June and July was "massively distorted" in favor of the eurozone periphery. Even before the ECB's new "Transmission Protection Instrument" inaugurated by the ECB Council at its July 21 meeting was activated, large amounts of money resulting from bonds maturing from the Pandemic Emergency Purchase Program and the older Asset Purchase Program had been channeled into new purchases of southern euro countries' bonds.

During June and July, for example, the ECB acquired Italian bonds amounting to [euro]9.8 billion, Spanish bonds amounting to [euro]5.9 billion, and Greek bonds amounting to [euro]1.1 billion. In return, German bonds amounting to [euro]14.5 billion have been sold from the stocks of the ECB, in addition to [euro]3.4 billion worth of Dutch bonds. "If the ECB continues to purchase Italian bonds for the next year at the pace it has done the last two months," a strategist said, "that money would correspond to an amount equal to half the Italian budget deficit."

Lagarde nevertheless argued that a "fragmentation" of the euro area following too much diverging bond yields must be avoided in order to safeguard the...