“Market sentiment” is one of the great syntagms of modern times. The markets sense that the European recession is looming: the euro exchange rate has fallen by 5% since July, interest rates on national debt are falling; Money is always scary. Companies are also starting to feel the curve tightening: wage growth in the eurozone is slowing, even though unemployment is at historic lows in several countries. These recession-shaped curves have several causes; This is a truism in economics; everything is multi-causal. Among the most important…
“Market sentiment” is one of the great syntagms of modern times. The markets sense that the European recession is looming: the euro exchange rate has fallen by 5% since July, interest rates on national debt are falling; Money is always scary. Companies are also starting to feel the curve tightening: wage growth in the eurozone is slowing, even though unemployment is at historic lows in several countries. These recession-shaped curves have several causes; This is a truism in economics; everything is multi-causal. Chief among them are geopolitics, a war in the neighborhood driving up commodity prices, and a rising power, China, seeking to deemphasize a declining power, the United States. Or the scars of the pandemic on half the world’s financial space, or the supply chain difficulties, or the combined shock of the technological and environmental revolutions; The list is almost endless.
In Europe there is another reason: the maneuvers of a European Central Bank (ECB) that has been disoriented since the departure of Mario Draghi. His successor, Christine Lagarde, has a long list of failures, including in communication, which her defenders say was her greatest asset when she took the position without any experience in the turbulent waters of monetary policy. It’s not the only one. His number two, Luis de Guindos, went straight from the Economics Ministry of the Rajoy government to the intersection between Harry Potter’s Hogwarts, the Death Star and Scrooge’s office in Dickens’ A Christmas Carol, the ECB’s headquarters in Frankfurt. Lagarde raised rates again when it was not necessary: her own forecasts are for a decline in inflation in the final stages of 2023 and next year. The hawks who currently dominate the ECB tell us that their mandate, the famous inflation target of “below but close to 2%”, can only be achieved with consistency.
The risk is that so much rigor ends up leading to rigor mortis. There aren’t many ways for a central bank to combat inflation other than to raise interest rates and sit back to watch as economic actors are forced to cut salaries and moderate prices as the economy cools to the point of freezing . This can lead to a slowdown. And in the worst case scenario, a recession. We’re going in that direction and creating a little economic suffering to take advantage of market forces in the form of prices and wages.
The ECB, in its love of pain, forgets a few things: that the Eurozone has accumulated two major crises in the last 15 years and that the loss of purchasing power of the middle class is bringing out some demons of the past; The discomfort is there and it scares you from time to time. What is also forgotten is that there are other measures to combat inflation in addition to monetary policy, as the Spanish case shows. And that the difference between good and mediocre politics depends on the credibility of the institutions, not on the literal adherence to a handful of rules written in bronze a few decades ago for a world that no longer exists. The inviolable rule of keeping the price target at 2% is more than controversial; the best minds in economics have been aiming for 3%, even 4%, for years in order to expand the scope of action of the central banks themselves. And the strict application of the anti-inflationary booklet is equally absurd: so much so that the ECB’s mandate makes it clear that the Eurobank must also deal with financial stability and, more diffusely, with unemployment and the economic situation.
The ECB was designed on the model and model of the Bundesbank, and in the German economic mentality, inflation is the worst devil, just as the United States’ worst nightmare is depression. Lagarde has the hammer out and sees nails everywhere, but what she has right in front of her face is stagflation – stagnation with inflation – and that cannot be fixed by raising interest rates like there is no tomorrow. Economics is a toolbox with different options. This time it was enough to keep interest rates at a plateau for a while, but the ECB, for reasons of supposed orthodoxy, decided to raise the pain threshold higher. Manca Finezza; The central bank’s leadership ranks include more former politicians concerned about their reputation than central bankers keeping an eye on the eurozone’s stability. There have been 10 increases since mid-2022; the last, unnecessary and more than controversial. We have not yet seen the full impact of this escalation. These things take time. But the pain is certain, we are rapidly heading towards the cliffs of recession. Congratulations to the winners.