Political Unrest Worldwide Is Fueled by High Prices and Huge Debts

The EU's decision to impose provisional tariffs on electric vehicles (EVs) imported from China starting July 4 has triggered strong dissatisfaction from both Chinese and European automakers, prompting the two sides to start consultations on the EU's anti-subsidy investigation of Chinese EVs in late June.

As the talks are underway, it is crucial for the EU to review the facts on the following issues to avoid politicizing economic and trade matters.

Never.

Collaboration between the Chinese and European automotive industries began 40 years ago when Volkswagen established a joint venture in China, followed by other manufacturers like PSA Peugeot Citroen, BMW, and Daimler.

Over the four decades, European car manufacturers have produced and sold a significant number of vehicles in China. Volkswagen had delivered approximately 40 million vehicles in the Chinese market by the end of 2022. BMW Brilliance Automotive, a China-Germany joint venture, rolled its 6 millionth vehicle off the production line in May. For both Volkswagen and BMW, sales in China account for over 30 percent of their global total.

While bringing advanced technologies, management experience, and production techniques to China, European automakers have also reaped substantial profits in the competitive Chinese market.

Even in the field of new energy vehicles, China and Europe are not engaged in a zero-sum game. Companies like Volkswagen and BMW have established research centers in China or collaborated directly with Chinese firms to drive technological innovation. This has helped European automakers better understand and adapt to the Chinese market, positioning them advantageously in electric and intelligent vehicles.

In recent years, Chinese EVs have progressed significantly, which surprised many in Europe. Yet their market share in Europe remains low. Still, some politicians are trying to exploit the situation for political purposes.

In fact, over the past 40 years, European carmakers have undoubtedly benefited from cooperation with China, as evidenced by their opposition to the EU's anti-subsidy investigation of China-made EVs. Major car companies such as Volkswagen, BMW and Mercedes-Benz have voiced their objections to these protectionist measures, regarding them as neither reasonable nor justified.

The German Association of the Automotive Industry said on Wednesday in a statement that the planned tariffs against China-made EVs would be counterproductive for Europe's climate goals and harmful to its industry and consumers. Western car manufacturers in China would also be affected, in some cases even worse than Chinese companies, it noted.

"Competitiveness is fostered through competition," the association said.

Probably the latter.

As observed by the Swiss newspaper Neue Zurcher Zeitung, if a country only produced for its domestic market, there would be no international trade. The automotive industry inherently operates on global production and global sales. In 2023, around 80 percent of cars produced in Germany and 50 percent of those made in Japan were exported, while only about 12.7 percent of China's EVs were sold to the international market. Accusations of China's "overcapacity" are therefore groundless.

According to research by the International Energy Agency, to achieve carbon neutrality, global sales of EVs need to reach about 45 million by 2030, more than three times the figure in 2023 and far exceeding current global production capacity.

Take the EU as an example. Its transportation sector accounts for nearly a quarter of total greenhouse gas emissions. To meet the net-zero emission target by 2050, the EU needs at least 30 million zero-emission vehicles on the road by 2030. From a supply and demand perspective, the electric vehicle sector is not experiencing overcapacity but rather facing a capacity shortage.

In essence, the EU's allegations of China's "overcapacity" in EVs and concerns about "supply chain security" are just excuses to prevent China from participating in normal international trade and undermine the development of China's EVs.

The so-called "dumping" of Chinese EVs in Europe is also exaggerated. Most EVs exported from China to Europe are Western brands made in China.

According to data from the European Federation for Transport and Environment, in 2023, 19.5 percent of EVs sold in Europe were produced in China, and only 7.9 percent of those were Chinese brands. U.S. carmaker Tesla's Shanghai factory exported around 340,000 vehicles in 2023, nearly half of which were sold to Europe. Thus, Chinese EV brands hold a relatively small market share in Europe, far from being the main players.

No.

China's success in the EV sector stems from technological innovation, a robust supply chain and a competitive market, rather than from subsidies.

A report by the U.S.-based Center for Strategic and International Studies has noted the importance of recognizing the tremendous advancements made by Chinese EV manufacturers and battery producers. Recent years have seen substantial improvements in the energy density, range, and reliability of Chinese EV batteries, as well as better designs, infotainment systems, and autonomy capabilities.

The EU's claim that China's affordable EVs are heavily subsidized and therefore disrupt the market is baseless. In reality, it is the EU's protectionist measures that are causing market disruption.

Subsidy policies originated in Europe and the United States and are widely practiced globally. China does not implement any subsidies that are prohibited under WTO rules.

In contrast, Europe and the United States have significantly intensified their subsidies for EVs in recent years, with a range of exclusive and discriminatory practices. This has created barriers for Chinese EVs and is in clear violation of WTO regulations.

No.

Industry insiders believe that the EU's investigation seeks to prevent Chinese EV companies from investing and expanding in Europe and to diminish the competitiveness of emerging Chinese industries, so as to protect local traditional industries. Timed before the just-concluded EU elections, this protectionist move is politically and geopolitically motivated.

The EU has always portrayed itself as a staunch defender of free trade, and it claims that its investigation is meant to determine whether China is excessively subsidizing its EV industry and will set tariffs based on the findings. However, in fact, the investigation was initiated without requests from member states or the auto industry.

Moreover, the investigation process was characterized by non-compliant sampling standards and a lack of transparency, seriously breaching WTO rules.

For example, the EU excluded high-sales producers from member states during the sampling process, demonstrating a clear discriminatory approach aimed at Chinese EV companies.

Visionary voices from Europe's political, business, and academic circles have urged that, instead of keeping Chinese EVs out, the EU should collaborate with China to leverage technological and supply chain advantages to enhance Europe's industrial landscape, meet emission reduction commitments, cater to consumers and achieve mutual benefits. Putting up barriers is nothing but a short-sighted move.

Traders will be sitting on the edge of their seats on Sunday, in anticipation of Monday’s open and what market impact the second round of the French election will have.

The far-right National Rally (RN) led the first round last Sunday, but the left-wing New Popular Front (NFP) was not far behind. The outcome also revealed that RN and its allies took first place in 296 out of 577 constituencies, which could translate in absolute majority in the second round.

However, left-wing and centrist parties formed an alliance and decided to withdraw their candidates in electorates where there is a three-way runoff, in an attempt to increase their chances of stopping RN from running the government.

The outcome of the European parliamentary elections revealed that the rise of Eurosceptic parties is a negative development for the euro, thus the coordinated attempt to halt Le Pen’s march is seen as positive.

However, even if the left-wing alliance secures victory and the euro opens with a gap on Monday, uncertainty will not vanish as investors may still be eager to find out whether this could lead to a stable government.

There is also the chance of having a hung parliament, where a minority government will struggle to pass legislation. This could lead to prolonged political paralysis given that no elections can take place for at least 12 months, but if the minority government is led by RN, it may not be that bad for the euro, as the other parties may do whatever it takes to block their Eurosceptic agenda.

In the US, Fed Chair Powell will testify on the economic outlook and recent monetary policy actions before the Senate Banking Committee. The Fed Chief will present a prepared statement and then the committee will conduct a Q&A session.

This week, at the ECB forum on central banking in Sintra, Powell said that they are getting back on “the disinflationary path,” adding though that they want to be more confident about inflation’s return towards their 2% target before they start loosening policy.

His comments were interpreted as corroborating the market narrative that two quarter-point rate reductions may be warranted this year, despite the Fed’s own dot plot pointing to just one. What’s more, following the disappointing ISM PMIs for June, the probability of the first reduction to be delivered in September has risen to 80%.

Although Powell is unlikely to deviate much from what he said in Portugal, the Q&A session may include more targeted questions that result in more clarity regarding the Fed’s plans.

Nonetheless, even if he insists that there is no urgency to press the rate cut button, whether the market pricing will drastically change could depend more on the outcome of the US CPI data on Thursday.

Taking into account that the price subindices of both the ISM manufacturing and non-manufacturing PMI surveys declined, the risks to the CPIs may be tilted to the downside. A further slowdown in inflation may convince more market participants to bet on two Fed rate cuts by December and thereby weigh on the US dollar.

There is also a central bank meeting on next week’s agenda. During the Asian session on Wednesday, the RBNZ will announce its decision on monetary policy, but no change on interest rates is expected. There is only a small 5% chance for a 25bps rate cut.

At its latest gathering back in May, this Bank said that they need to maintain policy at restrictive levels to ensure that inflation returns to target, while more importantly, they discussed the possibility of raising interest rates at that gathering.

Since then, retail sales for Q1 came in better than expected, while the GDP data revealed that the economy grew by more than expected during that period. Although inflation numbers were not released, the aforementioned data corroborate the Bank’s hawkish stance.

Yet, investors are penciling in slightly more than 40bps worth of rate cuts by the end of the year. With the RBNZ having little reason to shift to a less hawkish stance, a reiteration of the May message may prompt investors to scale back rate cut bets, thereby boosting the kiwi.

Kiwi traders alongside their aussie friends will also pay attention to the Chinese CPI and PPI data, due out just half an hour ahead of the RBNZ decision.

In the UK, with the general election behind them, pound traders may turn their attention back to economic releases. On Thursday, the monthly GDP for May alongside the industrial and manufacturing production numbers for the month are coming out.

With the Labor Party securing a majority in Parliament, the BoE may speed up its easing process on expectations of a more fiscally responsible government, which could prove negative for the pound in the medium term. Thus, improving GDP during the month of May is unlikely to severely alter market expectations with regards to the BoE’s plans.

The ringgit has depreciated against the US dollar in the run-up to 2024. In May last year, Bank Negara Malaysia raised interest rates to 3%, following the US Federal Reserve's rate hike and to curb inflation. The central bank is expected to maintain this rate throughout the year to support the weakening ringgit. With inflation having stabilised in recent months, it is crucial to examine the economic and trade implications of the ringgit's depreciation. We will begin by exploring the common theoretical framework regarding the impact of currency depreciation on export competitiveness, followed by a review of new evidence that could better guide our future actions.

Many nations employ a strategic approach to enhance their exports on a global scale: they allow their currency to depreciate. This may seem counterintuitive, but a weaker currency translates into cheaper products for international buyers. This in turn can trigger a surge in demand for these exports, thereby boosting the country's economy and potentially reducing trade gaps.

China's currency devaluation strategy back in 2015 serves as a compelling illustration of the effectiveness of this approach. Faced with slowing economic growth and the need to boost its export sector, China opted to weaken the yuan. This decision made Chinese goods cheaper and more attractive to international buyers, aiding its manufacturing industry and solidifying its position as a global export leader. By devaluing the yuan, China was able to offset rising labour costs and other internal economic pressures, allowing it to preserve its export-reliant growth model.

Bringing it back to Malaysia, a depreciation of the ringgit could have profound implications for its export-oriented sectors. As the ringgit weakens, Malaysian production costs become comparatively lower than those of foreign competitors, enhancing the affordability of the country's goods and services in the global market. This competitive advantage has the potential to stimulate demand significantly across key export industries such as semiconductors, electronics, palm oil and rubber. The anticipated increase in demand could theoretically drive up production levels, potentially leading to job creation and fostering overall economic growth.

While currency depreciation can be a useful tool to boost export competitiveness, it presents a double-edged sword. It makes imports more expensive, potentially leading to higher inflation and increased costs for businesses that rely on imported goods and services. Furthermore, sustained depreciation can erode investor confidence, triggering capital outflows and exacerbating economic instability.

This is particularly relevant for Malaysia, which imports a substantial amount of raw materials and intermediate goods for its manufacturing sector. The increased import costs due to a weaker ringgit could significantly offset the gains from higher export competitiveness.

While devaluing the ringgit might seem like a tempting strategy to boost exports in the short term, recent economic research suggests a more complex reality. Traditionally, the logic has been to weaken the currency and make exports cheaper, then strengthen it later to improve purchasing power. However, this approach may be flawed due to the disproportionate effect of currency fluctuations on exports.

If we were to follow this framework, we should devalue our currency to boost our exports and strengthen it again when our economy is strong to boost purchasing power. However, the new and revised evidence shows that currency depreciation and appreciation have a disproportionate effect.

As highlighted in a recent World Bank blog post citing a case study of Malawi and Pakistan, exports often respond weakly to depreciation but steeply decline with appreciation. The study found that a 10% depreciation only yielded a 7.7% and 6.2% increase in exports for Malawi and Pakistan respectively, in the next year. Conversely, a similar magnitude of appreciation led to a significant drop of 23.5% and 22.6% in exports for these countries.

The study reveals that currency depreciation doesn't always lead to a significant increase in exports for two main reasons. First, the lack of information about foreign markets makes it difficult for companies to quickly establish new trade relationships. This is particularly challenging for exporters of specialised products, which require strong relationships with buyers and a deep understanding of market demand. In contrast, exporters of standardised goods can easily find new markets when prices drop. Since Malaysia's export sector is largely composed of specialised manufacturing products, currency depreciation is unlikely to have a significant positive impact on exports in the short term.

A second factor that hinders the effectiveness of currency depreciation in boosting exports is the presence of supply constraints. Companies that rely heavily on physical capital and financial resources face significant obstacles in scaling up their operations, even if production costs decrease. This can be due to limited access to necessary equipment, infrastructure and financing options. For instance, manufacturing industries may struggle to quickly increase production due to the high costs and time required to acquire and install new machinery. Similarly, sectors with high operational complexity, such as pharmaceuticals, chip manufacturing and energy, are particularly susceptible to project completion delays due to the intricate nature of their work and the immense capital investment required. While lower production costs can be beneficial, overcoming these supply constraints is crucial for achieving sustainable and rapid growth in these industries.

This evidence suggests that while currency depreciation can provide a short-term boost to export competitiveness, the long-term impacts may not be as significant. Moreover, the negative effects of currency appreciation on exports are much more pronounced. Therefore, while the weakening of the ringgit could offer immediate relief and support for the export sector, it is crucial to address underlying economic fundamentals to ensure sustained economic growth and stability. This includes enhancing productivity, diversifying the economy and improving the business environment to attract and retain investment.

Since currency devaluation does not significantly enhance export competitiveness but rather increases the cost of imports, the recent weakening of the ringgit poses considerable harm to our economy. Recently, the central bank has utilised currency forwards to stabilise and potentially strengthen the ringgit, a positive step forward. However, it is crucial to prioritise efforts that boost business and investor confidence. Continued commitment to enhancing our fundamentals, including improvement in our business environment and infrastructure, and implementing sound policies, remain paramount for sustaining Malaysia's long-term competitiveness.

In Australia, the Minutes from the RBA June Meeting provided more colour around the Board's deliberations, in particular its considerations for monetary policy in the context of lingering inflation pressures. The case for another rate hike was premised largely on the RBA's assessment that demand had continued to outstrip supply and that this imbalance could continue –the former could hold up better than expected, or the latter could be more constrained than currently assumed – increasing the possibility that inflation will take longer to sustainably return to target. The case for leaving policy unchanged was deemed stronger, the Board of the view that "the economy was still broadly tracking on a path consistent with returning inflation to target in 2026, while preserving as many of the gains in employment as possible."

Chief Economist Luci Ellis highlighted that it is the 'gaps' between demand and supply, whether that be in the labour market or the broader economy, that are receiving a greater focus in the Board's policy deliberations. Here, it is noted that both labour market tightness and the output gap are assessed as narrowing, but given the difficulty in precisely estimating such dynamics, there remains uncertainty in judging when the 'gaps' might actually close. For now, the Board expects inflation to continue decelerating towards target as demand and supply come into better balance, but it needs more confidence in this view before debating the timing and scale of easing. Last week's partial inflation data may have unnerved market participants but it had no impact on our inflation forecasts nor our view on the interest rate outlook. We continue to believe the Board will have this confidence by November, allowing the RBA to embark on a measured rate cutting cycle, 25bps per quarter to 3.10% in Q4 2025.

Other data received this week were largely focused on the consumer and housing. On the former, retail sales beat expectations, rising 0.6% (1.7%yr). However, most of the strength can largely be attributed to inflation and population growth, with real per capita sales likely tracking in the realm –2.5% to –3.0%. Meanwhile, growth in dwelling prices continues to forge ahead at a solid pace, up 0.7% across the nation's eight major capital cities. While the latest increase in dwelling approvals was certainly welcome, the outlook for new dwelling investment remains fragile, at odds with needs of a rapidly growing economy.

Offshore, the focus was on the US with the June ISM PMIs. The ISM non-manufacturing index fell 5pts in June from 53.8 to 48.8. This is the second sub-50 reading in three months, but more importantly the June read is almost 7.5pts below the decade average. The employment index also fell back to April's weak level (6pts below average) after rebounding in May. Business activity and new orders also dropped sharply in June. The level of these sub-components speak to the risk of outright contraction against our base expectation of modest growth, warranting close monitoring ahead. The ISM manufacturing survey edged lower from 48.7 to 48.5 against expectations for a modest lift to 49.1. Production deteriorated, from 50.2 to 48.5, but new orders gained in the month, from 45.4 to 49.3. Both sub-indexes are below their respective six-month averages, signalling a continuation of the sector's deceleration. At 49.3, the employment sub-index was again consistent with outright job loss. Prices paid fell back to 52.1 in the month, below both the six-month and long-run historic averages.

The FOMC also released its minutes for the June meeting which were consistent with the Committee's positive forecasts for the economy. Policy is viewed as restrictive and as working toward bringing about desired inflation outcomes in time. That said, there were some notes of caution over momentum in the labour market, in particular "several" participants noted that nonfarm payrolls may be overstating job creation. Anecdotes on the labour market and consumer behaviour were also used to justify the view that both wage inflation and consumer inflation is continuing to decelerate. That said, "some" participants were willing to raise rates should inflation remain elevated. That raising rates was not considered and inflation looks to be on its downward trajectory suggests this scenario remains improbable. Despite the shift to only one cut this year in its published forecasts, the Committee looks to be ready to begin easing as incoming data give confidence in inflation's downtrend and/or should downside risks materialise. We maintain our view that rate cuts will begin in September 2024. For more detail, see our latest edition of Market Outlook, published earlier today on WestpacIQ.

The June JOLTS survey provided further evidence of labour demand and supply coming into balance. The job opening count was a touch higher than the market expected at 8.14mn, but the job opening rate was little changed from May and within 0.5% of the pre-pandemic level. The hiring, separation and quit rates were also all near their pre-pandemic averages.

In Europe, the European Central Bank held its annual conference in Sintra, the key event being a panel with ECB President Lagarde, FOMC Chair Powell and Bank of Brazil's Campos Neto. Lagarde and Powell's remarks were both constructive on inflation and the health of their respective economies. Powell in particular noted that the US is back on a "disinflationary path", but that further confidence is necessary amongst Committee members before acting. Powell also made clear that the risks the US faces are increasingly balanced, with downside risks to the labour market coming into view.

Euro Area inflation was as expected in June, prices rising 0.2% in the month and 2.5% over the year. Core inflation was a touch stronger than consensus at 2.9%yr as services inflation held around 4%yr, a rate held since the start of this year. Overall, this flash release indicates goods remain the predominant disinflationary force and further progress on services will be needed for inflation to remain sustainably at target. The unemployment rate remained at 6.4% in May. Labour market conditions are heterogenous across the region with services-oriented industries seeing labour market tightness persist while others see slack building.

In Asia, the Bank of Japan's Q2 Tankan Survey reflected a constructive outlook with some risks emerging on the horizon. The outlook on general prices remains little-changed around 2.0% for the 3-year and 5-year horizons, suggesting inflation expectations are holding firm. Forecasts for employment conditions declined further, suggesting businesses are expecting it to be difficult to secure labour ahead. Persistent sentiment around labour scarcity will support wage negotiations ahead. Expectations for investment continue to grow – at present they sit around where they were prior to the Asian Financial Crisis when capacity was expanding rapidly. Profits however are expected to decline. This creates risk to both the investment and wages outlook as strong profitability has supported both over the last year. Wages and investment need to remain strong for inflation to persist and for policy to normalise further.

Week after week, someone releases a new estimate of how many trillions of dollars of assets will be tokenised in the next few years. Breathless optimism around the promise of a new technology is hardly rare in the tech world, and they don’t always pan out as expected. But for tokenisation, the excitement has spread well beyond the boardrooms of Silicon Valley venture capitalists.

More renowned institutions like the Bank for International Settlements have planted their flag in the camp that holds that tokenisation should become the plumbing of the financial systems of the future. In their ‘Finternet’ paper, the BIS lays out a vision of an ecosystem where assets from an enormous variety of classes are tokenised, allowing them to be seamlessly exchanged for tokenised versions of cash without settlement delays and the risks and costs they entail.

But excitement alone is not enough. Delivering a tokenised ecosystem will take a great deal of work. Fortunately, years of experiments and proofs-of-concept have proven that the basic functionality of tokenisation – representing an object as a token on some version of a ledger (often shared or distributed) between network participants – is not especially technically difficult.

In this edition of OMFIF’s Digital Monetary Institute Journal, our expert members give their opinions on where tokenisation is heading, where the process is taking us and how to approach outstanding issues along the way. This year’s DMI Journal is based on discussions that took place at the 2024 Digital money summit, our annual flagship event where experts and policy-makers discuss the future of money.

In a conversation at the summit, Nick Kerigan, managing director and head of innovation at Swift, expanded on the infrastructure necessary to realise the BIS’ vision of the ‘Finternet’: ‘A messaging layer – for the exchange of rich, structured data about a transaction – would be a critical component of something like the Finternet.’

However, the technology stack of a fully tokenised ecosystem requires much more than the basic functionality, and as new asset classes are tokenised, many of these problems will become more complex. Scalability, interoperability between ledgers, integration with existing systems and, perhaps most importantly, security, will all require extensive development and testing to prove they are suitable for financial markets.

The governance considerations involved in delivering a tokenised ecosystem will perhaps be even more challenging. For such a system to be valuable, it must operate across borders to ensure that liquidity is not trapped in siloes. That means agreeing on governance standards for the trading of a broad variety of instruments. Developing that kind of commonality will not be easy, and as Rajeev Bhamra, head of digital economy strategy at Moody’s Ratings, writes, not everyone will necessarily be pulling in the same direction because ‘some market participants may be reluctant to adopt this technology due to potential disintermediation’.

However, although the challenges are daunting, tokenisation will not be an all-or-nothing proposition. The journey to a tokenised ecosystem will be made up of incremental steps – tokenising another instrument, building another functionality, onboarding another stakeholder – each of which will be required to have its own justification and generate business value.

These are already emerging. Both the private and public sectors – often in collaboration – are building tokenisation use cases. For instance, Basak Toprak and Wee Kee Toh from Onyx by JP Morgan, highlight Project Agorá as a global industry initiative set on ‘building on the experience gained from the live commercial bank money applications and use cases.’

Pockets of tokenised value are also emerging. Repurchase agreements have been a particularly fertile ground, but signs of tokenisation springing up in other markets are emerging. Financial markets may soon look like a patchwork of different tokenisation projects. From there, if inter-ledger interoperability is solved, we will be closer to the BIS’ vision of the ‘Finternet’. But while challenges remain, the 2024 DMI Journal finds that it is undoubtably an immensely exciting time for financial market infrastructure.

The European Central Bank has faced questions about whether it would shore up France's rattled bond market ever since President Emmanuel Macron called a snap parliamentary election last month, raising the prospect of a far-right government.

Policymakers remain in no rush to act, also in light of calmer markets since the first round of voting handed Marine Le Pen's far right National Rally fewer seats than expected. But the risk of an RN-led government after Sunday's second round is far from averted.

Here is what Reuters found out about the ECB's thinking at its annual Forum on Central Banking in Sintra, Portugal, after conversations with more than a dozen Governing Council members:

The ECB's Transmission Protection Instrument (TPI) allows it to buy an unlimited number of bonds from a euro zone country that is suffering from a disorderly and unwarranted tightening in financing conditions.

The rise in the risk premium investors demand to hold French debt to a 12-year high of roughly 80 points a few weeks ago did not meet either condition, according to ECB chief economist Philip Lane, who described it as simple "repricing" in an interview with Reuters.

Another policymaker at the Sintra gathering said even a risk premium - gauged by the gap between French and benchmark German sovereign bond yields - of 100 basis points would not warrant action and another said the current spreads appear tight considering France's high public debt.

In general, policymakers would need to see a big enough rise in yields as to hamper the transmission of the ECB's interest rates to the economy.

"If we conclude that transmission is working that’s the end of it," Irish central bank governor Gabriel Makhlouf told Reuters.

An ECB spokesperson declined to comment for this story.

That is subject to interpretation and a little divisive. TPI comes with a number of conditions for eligibility, including compliance with the European Union's fiscal rules.

This may prove a problem for France, which is under an "excessive deficit procedure" by the European Commission, although ECB President Christine Lagarde has said this is just "an alternative condition".

Most governors think the ECB should take its cue from Brussels and not come to France's rescue until Paris has hatched out a deal with the Commission about reducing its deficit.

But a couple of them admitted that the ECB's hand might be forced well before that process, which is likely to take months, is completed.

This would particularly be the case if the bond selloff in France spreads to other debt-laden countries such as Greece, Italy, Portugal and Greece.

"The European Central Bank has to do what it has to do," Lagarde said during a panel discussion in Sintra. "Our mandate is price stability. Price stability is obviously relying on financial stability, and we are attentive to that."

European central bankers have not started making plans for this doomsday scenario and still hope TPI will never be used.

Some envisaged the notion of a temporary intervention, in the spirit of the Bank of England's short-lived foray in the gilt market during the mini-budget crisis of 2022.

Financial market participants speculate the ECB might buy bonds from countries other than France but central bankers found the notion of fighting a fire without tackling its source unconvincing.

Others were petrified at the prospect of buying massive amounts of bonds from multiple jurisdictions, which may drag the ECB back to the world of money printing it is trying to leave behind.

Fundamentally, policymakers want to avoid any commitment or hard rule so they can react as they see fit.

"I think it's very important that we don't give any signal to the market that we have some kind of automaticity, limits, or hard constraints in what we do," Belgian governor Pierre Wunsch told Reuters. "The rule is that it must be unwarranted and disorderly. It will be a judgment call."