Lagarde, Putin, Biden and the trouble with drawing red lines

Christine Lagarde, the president of the European Central Bank, is svelte, urbane and French. She knows better than to show up at a press conference and say brutish things — such as “Bring it on,” or “Go ahead, make my day.” Or even: “Don’t cross my red line.” 

But a red line is, in effect, what she drew last week. Lagarde and her colleagues at the ECB are worried that rising interest rates, excessive debt and political turmoil will lead to Euro Crisis 2.0, which would start in Italy this time. 

So she unveiled the so-called Transmission Protection Instrument. The name makes sense only to central bankers, if at all. As my colleague Marcus Ashworth has pointed out, TPI is best understood as “To Protect Italy.” Lagarde is signalling that, if yields on Italian bonds shoot up, the ECB will snap up the securities to stabilise their price. The point is to convince speculators to not even try. Put differently, the goal is deterrence.

Deterring people from doing undesirable things — by drawing literal or figurative red lines — is a large part of what powerful people do for a living. 

Russian President Vladimir Putin, both before and since his invasion of Ukraine, has 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 respond” if Russia were to use chemical or nuclear weapons. 

Red lines — the term apparently dates to a meeting a century ago, when somebody physically marked up a map of the Middle East — pop up wherever there’s power and conflict. In 1950, Maoist China drew one along the 38th parallel on the Korean peninsula, warning the Americans not to cross it going north (they did anyway). With better luck (so far), Beijing also drew a red line deterring Taiwan from declaring independence, on pain of a mainland invasion. In 1979, the US in turn scrawled something vaguely magenta to keep China from attacking the islands. 

Elsewhere in the Cold War, the superpowers used to draw all sorts of lines for each other. The Middle East is criss-crossed by the squiggles of so many scribes that some regional maps look like Jackson Pollock paintings. Lest the metaphor get stale, Benjamin Netanyahu, a former prime minister of Israel, once painted a physical red line on a diagram of an Iranian nuclear bomb while addressing the United Nations General Assembly.

Wielding red pens is not the same as coercion — that would be an ultimatum, rather than a warning. It’s just a way to signal to adversaries to back off or else. The popularity of the practice is surprising, because it’s fraught with risks.

One concerns credibility. Could you, and would you, actually follow through if 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 doctrine of “mutual assured destruction” succeeded in deterring the use of nuclear weapons because retaliation did appear certain and cataclysmic. 

In the money world, Lagarde’s predecessor at the ECB, Mario Draghi, staked all of his credibility in 2012 when he calmed the first euro crisis by pledging to do “whatever it takes.” That was also code for a bond-buying program to deter speculators. Draghi won — the ECB was never forced to use it. (Unfortunately, he couldn’t repeat the trick; as Italian prime minister, he was unable to prevent the current turmoil in Rome with sheer gravitas.)  

The second challenge has to do with clarity. If you draw the red line too precisely, you risk daring the adversary to go all the way up to whatever threshold you determine. Set it at the use of nuclear weapons, say, and the enemy may be encouraged to resort to the biological or some other sort.

But vagueness can be worse. In 2012, Barack Obama, US president at the time, publicly told his Syrian counterpart Bashar al-Assad that “a red line for us is we start seeing a whole bunch of chemical weapons moving around or being utilized.” 

Huh? What’s the red line here — the moving, or the being utilized? And when does a mere bunch become a whole bunch? To Assad, this looked more like a scribble with some pinkish shading. Obama was no clearer on the threatened “consequences,” except to suggest that they would be “enormous.” 

Ignoring Obama’s red line, Assad did use chemical weapons a year later, and the US didn’t retaliate. The episode is regarded as a major embarrassment for American diplomacy. The lesson is: If you can’t define the threshold even for yourself, or aren’t prepared to punish its trespass, leave your marker capped.

Where does that leave us in the summer of 2022, with the various red lines drawn of late? Nowhere good, is the short answer. 

Putin still hasn’t clarified where his red lines run. Obviously, he wants the US, NATO and the European Union not to defend Ukraine. But that’s only kept the West from sending troops and enforcing a no-fly zone above Ukraine, lest NATO be forced to shoot directly at Russians. The West is, however, sending weapons, including big guns that could hit targets inside Russia. Putin risks looking weak if he keeps moving the line, and that makes him even more dangerous.

Biden, for his part, is facing the mother of all dilemmas. He obviously wants to prevent Putin from escalating to chemical or nuclear warfare. But how can he define the threshold when the adversary, a notorious practitioner of “hybrid warfare,” specialises in fudging? The West would surely retaliate one way if Putin nuked a Ukrainian city, another way if he “merely” set off a low-yield atomic bomb in the middle of the Black Sea to show he means business. Should the “consequence” in that case be a military strike? And if so, a conventional or a tit-for-tat nuclear one? 

The stakes for Lagarde are lower — the unravelling of the euro area, rather than nuclear Armageddon. But she faces a similar conundrum. She did her best to stipulate various conditions before launching the TPI — probably to appease hawks on the ECB’s Governing Council who fret that the bank may stray beyond its mandate. But, channelling Biden, she emphasised that both the decision to intervene and the scale of the response would be discretionary.

Experience suggests that the most effective deterrence lines are “either red and blurred, or pink and clear.” Lagarde’s, so far, is neither. That may be why bond traders are upping their antes rather than folding. Is the red line at 250 basis points between Italian and German bonds? 300? Anybody’s guess. By the looks of it, this is another red line that will be tested.

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