Yesterday I said “don’t fight the Fed”. How about the ECB, how is it doing in its fight against record inflation? In a word, it’s doing nothing.
The real (inflation adjusted) main refi rate, the ECBs main policy rate, is currently at minus 9%, a record negative reading that - if anything - promotes inflation instead of fighting it.
Yes, it’s true that the ECB faces serious troubles: Italy, Greece, Portugal, even France, are highly indebted and a jump in interest rates will pose a serious threat of bankruptcy. And unlike Greece in 2010, this time such an event will be the end of the euro as we know it. So, Mrs. Lagarde is choosing inflation, what she thinks is the lesser of two evils.
She is making an enormous mistake, being completely deaf to people’s cries of despair over the enormous price increases in basic necessities: energy, food, transportation and housing.
Social unrest is rising: Italy is almost certain to swing hard right in next month’s elections, its population totally disgusted with “politics as usual”. Labor strikes are becoming more common after decades of inaction. Governments in the EU are providing stopgap subsidies for electricity and fuel, but they are nowhere near enough and no one is getting fooled. Germany provided near free train travel until the end of August, Greece has devised "Fuel" and "Power" passes that subsidize gasoline and electricity to the tune of 40-80 euro per user, etc. But those amounts pale by comparison to utility, food, transport and housing bills, which are only going to get much steeper when the heating season begins in a month or two. Even the UK is facing a “heat or eat” winter.
Mrs. Lagarde has to move, and she has to do so fast.
PS The only thing that will work in bringing down soaring prices, especially in energy, is a firm realization by "the free market (laugh!)" that ECB is willing to do "whatever it takes" to kill inflation. OK, forget raising rates by too much. How about a very sharp eurozone QT? It will certainly work. Because things cannot continue like this... (see below).
Natural Gas Prices Have Exploded 1000% In One Year
Sharp QT in the eurozone ? I do not see that happening. Who is going to buy sovereign debt of Italy, Spain, Portugal, even France if not the ECB ? Nobody (or at prohibitive rates). Even the american banks refuse european bonds as collateral at 10 cents to the dollar...
ReplyDeleteEurope destroyed its bond market after 10 years of negative interest rates and the next thing to go is the currency (big money is already flying from the euro).
And do not forget that Lagarde is only a politician.
"And do not forget that Lagarde is only a politician".... YOU HIT THE NAIL ON THE HEAD
Delete