The Central European part and the end of the “empty counter” | opinion

    The hydrogen everyone is talking about |  opinion

We had gone more than a term without raising interest rates in Europe and we were enjoying the lowest fly cost in history when the ECB woke us from a peaceful slumber with a rate hike of 0 .50%. Moreover, he told us that this is only the first step in a generous process of monetary normalization, which means that funding will continue to become more expensive in the coming quarters.

Citizens and companies will be forced to allocate a large part of their economic assets to the subscription of credits and loans, which will result in a weak capacity for consumption and investment and, consequently, in weak growth. chrematistic. And that is exactly what the ECB intends to do, to curb the flow to alleviate inflationary pressures. The problem is that this is a complicated proposition because the list is very thin between a worthwhile slowdown and an economic recession. It’s like they want to suffocate us a bit, but they don’t want to pass out, and it’s a very dangerous distraction.

That’s not to say I’m against raising interest rates to fight inflation, but what’s wrong is that it’s taken them so long to look at the problem caused by inflationary pressures and that they now have to make up for lost time by concentrating increases drastically and in record time, because when things are done quickly and quickly, they tend to go wrong.

It should not be forgotten that the problem of inflation did not appear suddenly, but has been implicit for years, based on an official calculation which does not reflect the effectiveness of the prices paid by citizens. We have also tried to convince ourselves that it is natural for interest rates to be zero and even negative for years.

We closed our eyes when the monetary and fiscal stimuli were articulated in the wake of the pandemic, which required an exponential increase in the money supply, is to propose, to create a fly of absence and to inject it into the system under pressure. But we all knew that when you greatly increase the supply of a product, you decrease its value, and that’s what we did with the fly, increasing its quantity so much that it lost purchasing power , which is exactly what inflation means.

The President’s speech from the Central European side sounded triumphant, despite having resoundingly failed with his monetary policy for quarters and denying the problem of inflation, despite being stuck at a level of 8.6% when its only mandate is to maintain price stability. Yet Lagarde puffed out his chest, speaking of the directors’ unanimity on the desirability of raising interest rates by half a percentage point and in favor of starting a new rig, the “fly transfer protection rig”. acronym in English, TPI.

This is a piece of software intended to tackle potential funding crises in certain European countries, especially the usual suspects: Italy, Spain, Portugal and Greece. Lagarde wants to achieve what Mario Draghi already achieved when he was president of the ECB during the crisis of the periphery and launched the OMT software. The idea is to show so much superiority and potential strength in the market that they will never have to use the tools available.

However, there are many differences between what happened in 2012 and the current situation. First of all, ten years ago we didn’t have an inflation problem and therefore the ECB didn’t have to raise funding costs. In the second extension, when Draghi’s OMT software was launched, the bond market already had risk premia above 500 points and it was easier to instill some calm among highly stressed investors. And third, the debt-to-GDP ratio of the most affected countries was almost 30% worse than today.

Later, almost talk about the special conditions of the TPI, since from the above it looks like a bazooka with unlimited potential, when in fact its use is strictly regulated. We are talking about the economic conditions that must be met by the countries that want to benefit from it and which must prevent it from becoming a mechanism for financing waste and the neglect of budgetary discipline by the members of the European Union.

Without going into precise details, but for a better understanding of the readers, Spain did not comply with these conditions from 2012 to 2019 and from then on we did not comply, but with the appearance of the pandemic , all but the countries meet their budget commitments. .

So I think we’re facing a very different second split of the year than the first, in which citizens and businesses will have to envy the distraction of choking without fainting while the government plays another distraction called control plays the budget in an area of ​​rising interest rates.

Paul Gil is chief strategist at XTB

Original Spanish content

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