Henrik Böhme comments that it was probably too late to take this step. In the end, the pressure was too high. Inflation has gripped the eurozone more and more, and it has become clear that inflation is not a “temporary phenomenon” as the European currency protectors on the towers of the European Central Bank have been repeating since the beginning of the year. On the contrary, the ever-increasing increase in energy and food prices has become a danger that puts the industry and consumers under an ever-greater burden. Both for the economy and the conjuncture, but also for the whole society…
Governments all over Europe are trying to fight it. For example, the German government has applied energy support to households, discounts on gasoline and discounted tickets for 9 euros in public transport. However, it is those at the Central Bank who are in a position to really do something about ever-increasing prices. Because only they can intervene in the interest. And only when interest rates are raised can there be hope that prices will not rise. This is the common and valid doctrine, except for Ankara, but that is another story. There the omnipotent President believes that high interest rates are causing prices to rise.
Now there is a decision of the European Central Bank Council that seems a little strange. After 11 years, the interest rate will be increased again. And despite the fact that the Central Bank executives, especially the President Christine Lagarde, had prepared the markets for an interest rate hike in recent weeks, they did not use this opportunity on Thursday and postponed the interest rate step to the next session on July 21. This is wasted time!
Why is this a waste of time?
Because consumer expectations are getting more and more fixed on prices that increase every week. As a former Bundesbank Governor said in the 1970s, “He who starts flirting with inflation will marry her.” This means: Rising prices also encourage inflation. Because sooner or later the unions will also have to demand higher wages, which will raise prices once again. It is also very difficult and painfully possible to bring this situation, called the wage-price spiral, back under control. Therefore, the step announced by the European Central Bank is correct, but probably too late and a small step.
Of course, the securities market reacted to this with a drop in the exchange rate, the announcement itself was enough to make it happen. But what is certain is that when the drug is taken from the addict’s hand, he reacts violently. The drug, in this case, is the purchase of all kinds of assets that the ECB has used extensively for years to support the markets and constantly pump fresh money through the back door. According to the calculations of the researchers of the European Economic Research Center (ZEW) based in Mannheim, the money used by the European Central Bank for this purpose is approximately 4 billion 400 million euros.
There will be no new aid programs
The dilemma of euro savers is always having to choose between two evils. They are curbing the rise in prices by raising interest rates, but at the same time, there is a danger of crushing the delicate flower of economic revival that bloomed after the pandemic with too strong interest rate hikes. Moreover, high interest rates create difficulties for countries with high debt burden, such as, say, Greece and Italy. They can only get along with a zero interest policy because new borrowings can only be favorable in this way. In addition, the number of companies with high debt burden is not small, and they may be under the interest wave that will come into effect soon. Because Christine Lagarde announced today, at least, that the rate hike in July will be just the beginning, likely to be followed by a stronger hike in September.
This also means that the borrowing rules that the European Union once put into effect (which, as it is now, exist to be constantly violated or invalidated) must be reinstated as soon as possible. Currently, there is no need for giant conjuncture programs because the existing corona aid packages need to be invested first. After all, these huge aid packages are factors that seriously increase inflation.