Support it and don’t change it. This Golden Age expression, popular among nobles, describes the stubbornness of the ECB in its policy of raising interest rates, which, given the results, would lead to the above sentence having to be supplemented by a support rather than a change. until it kills.
Because that is what Christine Lagarde and her colleagues at the Central Bank of the EU countries are doing with the economy in Europe, as confirmed by the latest forecast report from the European Commission, which already assumes a stagflation situation, predicting growth of only 10% forecasts 0.8%, with inflation at 5.6%, the effects of which are as follows: loss of purchasing power of private households with a consequent decline in private consumption, increase in business costs affecting sales prices, increase in unemployment and decline in GDP.
A stubbornness that clashes with the voices of experts and analysts, with more and more arguments warning that raising interest rates will not help win this battle against inflation because it is a wrong strategy. And if not, there are the results. The ECB has raised interest rates up to 10 times in a row to take them to their highest level in 20 years, and inflation in the euro zone remains anchored at 5.3%, according to August Eurostat data, while underlying inflation , which does not take into account energy and unprocessed raw materials, food remains unchanged, constant and does not fall below 6%.
Here, Ms. Lagarde confirms herself as a loyal supporter of the orthodox policies of her predecessor and compatriot Jean Claude Trichet, who raised interest rates in the midst of the financial crisis – a decision that has proven to be the biggest mistake in the history of the ECB. But with the fate that there is no longer a Mario Draghi in Europe who would solve the problems like he did back then.
Keep in mind that there are two types of disruptions associated with the ongoing price rise: demand inflation and supply inflation. And in the case that concerns us today in Europe and Spain, it seems obvious that after the sharp slowdown in the economy as a result of Covid-19 and the invasion of Ukraine, with significant declines in activity and consumption, seasoned by the serious supply problems of Bei Raw materials and intermediate products, we are clearly dealing with supply inflation due to cost inflation. That is, the increase in prices is not caused by an increase in demand, but by the increase in production, energy, transport and labor costs, as well as by an abusive increase in taxes and duties.
It is an isolated case in which the application of indiscriminate measures to increase interest rates leads to the restriction of the circulation of money by companies and individuals, which also increases the prices of mortgages and loans and affects the ability of companies to finance their operations, resulting in A decline in consumption leads to investment with the consequent negative impact on production and employment, which will ultimately lead to a longer and deeper recession, resulting in job destruction and an increase in poverty.
And this is where the controversy arises. Because unlike the United States, which is a net exporter of energy, in Europe we import raw materials but are exporters of manufacturing and industrial products, which should be reason enough for the ECB to start abandoning the North American path rather than abandoning it increase prices. Rates for the devaluation of the euro. It is true that this would make importing energy more expensive, but it is also true that it would help increase exports and stimulate the economy. All of this accompanied by stimulus measures such as tax cuts to promote productivity and competitiveness.
Now it seems – be careful! It seems easy – that Christine Lagarde will give up her obsession with further increasing the price of money, but she is postponing the rate cut at least until after next summer. Almost a year away. How long have you trusted me!, lady; and how much damage can still be done.