The president of the European Central Bank, Christine Lagarde, in October 2021.Michael Probst (AP)
The European Central Bank (ECB) faces its great litmus test this Thursday, a double challenge that few issuing institutes in the world, if any, face.
First, it must return to its essence and dust off the manual for combating runaway inflation for a year, or what amounts to the same thing, raising interest rates.
And, at the same time, it has to prevent at all costs that the monetary area that it regulates — 19 countries, each with its fiscal policies, its labor markets, its budget balances, its political systems and its democratic governments — from fragmenting and driving it to another euro crisis.
The solution that is being outlined, and which may begin to emerge this week, involves increasing the price of money (interest rates) and creating a mechanism that intervenes in the capital markets when it concludes that there is an unjustified difference between the returns that the different countries of the monetary area have to pay for borrowing, the so-called risk premiums.
These two dilemmas are not being faced by the Bank of England, the Bank of Canada or the Federal Reserve, institutions that have been making the official price of money more expensive for some time, points out Paul de Grauwe of the London School of Economics.
And on them more elements of pressure are added.
One is the weakness of the euro against the dollar, after the continuous rises in interest rates in recent times: 75 basis points at their last meeting, the largest increase since 1994. And the other, the new drama of Italian politics, that brings the country closer to new elections with the specter of far-right populism Fratelli d'Italia leading the polls and putting an end to the government of former ECB President Mario Draghi himself.
Hence, to summarize this alternative in a single sentence —we will see if it is correct— is to reduce the complexity of the debate that has taken place in recent weeks both in the ECB and outside it.
Each new inflation figure, 8.6% in June, has reinforced the arguments of those on the bank's governing council who defend that interest rates must be raised to contain prices, even though this adds obstacles to economic activity.
But the storm that fell on the risk premiums of the countries in the worst fiscal situation (Greece, Italy, Portugal, Spain, France, Belgium...) after the last ordinary meeting in June of the bank's governing council, when it became clear that this month he planned to raise rates for the first time in 11 years, it only cleared up when there was another meeting, this extraordinary one,
From there the discussion began.
On one side, the so-called
hawks,
those who defend raising interest rates quickly and stop buying sovereign bonds as soon as possible, even though this carries the high risk of ending up in a recession.
Among them are usually the governors of the central banks of Germany, the Netherlands and Austria, also this time with the support of Finland, the former European commissioner Olli Rehn and the ECB vice president, Luis de Guindos.
To the other, those known as
pigeons,
Spain, Italy, France, supporters of a slower rate hike with the true argument that much of the inflation is due to the high levels of energy prices, and advocates of an intervention mechanism that does not demand many conditions from the countries that may benefit from its action.
In the center, the president, Christine Lagarde, trying to find the formula that makes everyone happy.
In recent days, work has accelerated a lot to reach a shared point between both parties.
The meeting place could be for some to accept more aggressive rate hikes and others to grant a more flexible intervention mechanism, without major conditionalities and with power.
In the last hours there was optimism, financial sources point out.
That flexibility in the anti-fragmentation tool would give more freedom to act against inflation with less risk of the euro zone cracking.
That can mean that this Thursday the increase in interest rates was 50 basis points, more than the 0.25% announced in June.
And all conditioned by that great ghost that is political instability in Italy.
“The ECB is late”, attacks the German economist Daniel Gros, from the Center for Social Policy Studies (CEPS), a Brussels
think tank
.
He refers only to the fight against inflation.
He clearly aligns himself with those who defend that the price of money should have already been raised.
On the other hand, he does not see that it is the moment to start up the anti-fragmentation tool: “The two decisions must be separated.
The ECB cannot react to every market event."
Maria Demertzis, from Bruegel, the other great laboratory of ideas in the community capital, gives voice to the opposite position: “The decision is absolutely necessary.
They have been cautious because they are very worried.
Core inflation is not that high [4.6% in July].
The only possible solution is the gradualist path [to raise rates]”, she points out.
In an intermediate position is the Spanish economist José Carlos Diez.
"Of course it's very late," he says, agreeing with Gros or reports from the Dutch bank ING.
On the other hand, he sees this mechanism as totally necessary to avoid the disparity in risk premiums, which was already seen in the previous euro crisis.
"The ECB can cause a recession if it raises rates a lot," he stresses, which is why he declares himself in favor of a more gradual fight against inflation.
Diez also highlights the weakness of the euro as a factor that adds pressure and forces the Eurobank to act now "so as not to import inflation, because raw materials are paid for in dollars."
In other words, the single currency cannot continue to depreciate against the greenback because oil and gas (in short, energy) are more expensive.
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