The economic crisis after the pandemic and the Ukraine war started a huge inflation wave in Europe. The European Central Bank (ECB) has announced that it will increase a series of interest rates in 10 years in order to curb the inflation in the Eurozone.
The ECB is expected to make the first response in July. In Europe, governments are going for “anti-inflation package and wage increase” to prevent the impact of rising inflation on households.
Economists had predicted rising inflation in the spring months and interest rate hikes from the fall 6 months ago. However, when the Ukraine War pushed inflation to a higher-than-expected rate, the European Central Bank accelerated its “normalization in monetary policy” steps.
ECB President Christine Lagarde, in her statements from Slovenia, expressed her concern about the increase in the inflation figure of 7.5 percent in the Euro zone and called on governments to take anti-inflationary measures.
Giving the first clues about the ECB’s interest rate hike schedule, Lagarde emphasized that the rate hike should take place in July. Stating that the first Board of Directors meeting of the ECB to be held in the third quarter is on July 21, experts point out that the decision to increase the interest rate will also be discussed on this date.
The ECB last increased interest rates in 2011.
The Central Bank’s decision to increase interest rates marks a turning point in the Eurozone economies. The ECB last increased interest rates in 2011. Interest rates have been at negative rates since 2014. Since the beginning of May, warnings came from European central banks that “negative interest rates should be exited by the end of the year”.
The President of the French Central Bank stated that “a positive interest rate should be passed by the end of the year”. Other central banks joined the call. Isabel Schnabel, one of the 6 members of the ECB board of directors, said in a statement today that “The normalization of monetary policy becomes urgent”, while the new head of the German Central Bank Bundesbank, Joachim Nagel, spoke of “an increase that may occur in July”.
In order for the ECB interest rates, which are still at -0.5 percent, to turn positive, the first increase must be made at the beginning of the summer, and then one or two more until the end of the year. Worried that the 7.5 percent inflation rate in the euro area will be permanent, the ECB emphasized that this is a “true change of age” after the price recessions after the 2008 financial crisis. “Anti-inflationary dynamics seem less and less likely to return,” said Christine Lagarde, speaking of long-term policies.
Severe inflation shocks
Some countries in the eurozone are experiencing particularly “severe inflation shocks”. In five of these countries, price increases exceed 10 percent: Estonia (19 percent), Lithuania (16.6 percent), Latvia (13.2 percent), the Netherlands (11.2 percent) and Slovakia (10.9 percent).
The lowest inflation rate was recorded in Malta with 5 percent, while France was the Eurozone country with the second lowest inflation rate, after Malta, with 5.4 percent.
Wage increases are below inflation
Another important problem in the euro area is that wage increases remain below inflation.
In Spain, negotiated wages rose 2.4 percent in March, reaching the highest level since 2011. The Spanish Central Bank points out that “more and more workers are demanding articles that index their wages to inflation”. Wages rose 2.6 percent in Austria and 2.7 percent in the Netherlands. In Germany, the increase is expected to occur in the coming months.
Although the reopening of economies at the end of the pandemic caused a spike in demand, the fact that supply chains were still very erratic had an inflationary effect. The war in Ukraine added a severe inflation shock to all raw materials, primarily oil and gas.
Christine Lagarde, speaking of “long-term factors” as well as “shock elements”, said, “Globalization, which has a downward effect on prices, has been interrupted. The war in Ukraine and the epidemic in China showed companies the need to diversify their supply sources. Such a policy, how much “Whether it’s necessary, it has a cost. But while the war has negative effects, it could possibly also have a positive effect, such as accelerating the green transition,” he said. Lagarde drew attention to the possibility that oil prices may remain high for a long time.
The delicate task of central banks
As the economies approach recession, concerns are expressed that the ECB’s increase in interest rates may “suffocate the economy”.
However, even if inflation is not prevented, it is feared that it will pose a greater danger in the long run, and that high inflation will cause stagflation in the economy.
The European Central Bank calls on governments to take measures to increase the purchasing power of the people, such as wage increases or reductions.
Wages negotiated in Spain rose 2.4 percent in March, reaching the highest level since 2011. The Spanish central bank also points out that more and more workers are demanding clauses that index their wages to inflation. Wages rose 2.6% in Austria and 2.7% in the Netherlands.
In France, which is now preparing for the general elections after the two-round presidential elections, the government, which is waiting to be renewed after the elections, is preparing a law that includes measures and increases to curb the effects of increasing energy, fuel and food prices.
The bill, which includes removing the TV taxes of the French and reducing the social security contributions for the self-employed, will be on the agenda before the elections. The law includes regulations such as “freezing energy prices until the end of 2022, a reduction of 18 cents per liter in fuel, re-evaluation of pensions and minimum wages as indexed to inflation, controlling the increase in basic food prices, and reducing the contributions of self-employed people”.
The government, which started to prepare for a “social plan” due to the unification of the left before the general elections in France, plans to bring the bill that will cause a deficit of 4 billion Euros in the budget before the elections to be held on 12-19 June and leave the parliamentary discussions until after the elections.