July 21, 2022, 5:09 a.m. ETJuly 21, 2022, 5:09 a.m. ETUnlike other monetary policymakers, the officials at the European Central Bank have the extra challenge of setting one policy for many different countries, each with its own fiscal policy, economic outlook and debt level.As the bank tightens its easy-money policies by raising rates and ending its multitrillion-euro bond-buying programs, it is also trying to prevent government borrowing costs from diverging wildly across the eurozone and impeding the effectiveness of monetary policy.On Thursday, the bank is expected to announce more details of a new policy tool it is designing to stop borrowing costs rising out of sync with a country’s economic fundamentals.These differences among countries are most clearly reflected in sovereign bond yields, a measure of government borrowing costs. Investors will demand higher yields from countries that they believe are riskier to lend to, maybe because of a history of debt default or political instability or slow economic growth.Borrowing costs for Italy, which has one of the highest debt burdens in the eurozone, have risen sharply since the European Central Bank reaffirmed its plans to raise rates. This week, they surged again when the country’s government fell apart, with Prime Minister Mario Draghi resigning on Thursday after key parts of the coalition government abandoned him. The difference, or spread, between 10-year sovereign bond yields in Italy and Germany is now roughly double what it was at this time last year.The European Central Bank considers a sudden break in the relationship between government borrowing costs and economic fundamentals to be so-called market fragmentation. It has said …
