The European Central Bank is faced with a dilemma. It needs to tighten monetary policy in order to rein in unexpectedly high inflation and at the same time prevent fragmentation of financial markets across the eurozone.

History shows that fragmentation comes not only with a high economic cost to growth and jobs, but also potentially a high political one, with loss of public confidence in European institutions. However, the present instruments to address fragmentation have important limitations.

There is the Outright Monetary Transactions programme to buy government bonds of crisis-hit countries in unlimited quantities. Created after former ECB president Mario Draghi’s “whatever it takes speech” in 2012, it comes with tough conditionality. To trigger the ECB’s power to buy sovereign debt under the OMT, a country must first have been granted a rescue programme from the eurozone financial assistance fund, known as the European Stability Mechanism. This is politically very difficult for member states to accept.