Some two hundred distinguished guests are expected on Wednesday May 24 in the imposing tower of the European Central Bank in Frankfurt. For a gala evening, Christine Lagarde, its president, will celebrate the 25e anniversary of the institution, notably receiving the German Chancellor, Olaf Scholz, and at least five economic ministers from the countries of the euro zone. All these beautiful people must feast on fish and mango pie.
Behind the festivities, however, the ECB is going through a difficult period. Its official mission is to maintain inflation at 2% over the medium term in the euro zone. However, this is currently… 7% over one year, after having reached a peak of more than 10%. In this context, a little background music is emerging: at the end of the pandemic, the ECB made a serious mistake by letting inflation slip away.
“In 2021, the ECB was asleep at the wheelaccuses Mathieu Savary, chief strategist at BCA Research. But she was not alone, the error was collective, committed by all the major centrals, including the Fed and the Bank of England. »
The blindness of the time
Friday, May 19 in London, Mervyn King, former Governor of the Bank of England (2003-2013), made the same harsh judgment during a conference. “For twenty-five years, central banks have succeeded in controlling inflation. But today core inflation [hors énergie et alimentaire] is around 5%-6% everywhere, in the United States, the United Kingdom and the euro zone. There was clearly a serious error.
Rereading the speeches of two years ago illustrates the blindness of the time. In December 2021, when inflation was already at 5%, Mme Lagarde wanted to be extremely reassuring: “I see inflation as a bump. This has clearly increased over the past three quarters. (…) But it will eventually pass. Inflation is expected to decline in 2022.”
The error continued for long quarters. Every three months, the ECB’s services publish their inflation forecasts: in September 2021, they anticipated 1.7% for 2022; in December 2021, they revised their forecast to 3.2%; in March 2022, at 5.1%; in June, at 6.8%; in September, at 8.1%; in December, to 8.4%, which will ultimately be the final figure.
The origin of the error dates back to the pandemic. When governments locked down, suddenly shutting down economies, it was necessary to urgently fund social assistance and the salaries of people who stayed at home. Faced with market panic, the ECB announced a debt purchase plan, entitled “Pandemic Emergency Purchasing Program” (PEPP), initially for 750 billion euros. The intervention ended the financial panic and allowed governments to borrow at zero or even negative rates. “This intervention was of course necessary, but the confinement only lasted a few months, while the expenses lasted much longer”underlines Florian Ielpo, director of macroeconomic research at Lombard-Odier, a Swiss asset management group.
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