Grandstand. In December, the main central banks announced that they were going to put an end to their easy monetary policy. The only exception is the European Central Bank (ECB), which does not plan to raise interest rates in 2022, despite the inflationary risk.
The US Federal Reserve (Fed) plans to raise its key rate three times this year, while the Bank of England has already raised its key rate by 15 basis points. To remain faithful to its promise not to raise its rates before having repaired its balance sheet, the Fed will also accelerate the gradual reduction of its asset purchases.
However, is the ECB lax on inflation? Germany’s largest tabloid, Picture, is he right to make fun of Christine Lagarde, the President of the ECB, by nicknaming her “Madame inflation”?
No, three times no! Picture reflects the traditional German view that the ECB should be concerned almost exclusively with inflation, but this view is totally outdated in the Europe of 2022.
“Risk of fragmentation”
Mme Lagarde knows that stopping monetary stimulus after a crisis is a delicate operation. By driving up the cost of credit and stifling the recovery of over-indebted member countries such as Italy, Spain and Greece, raising interest rates too quickly could lead to the break-up of the eurozone. Economists speak of the “risk of fragmentation”. This fragmentation is a chronic problem for the euro zone because, unlike the Fed and the Bank of England, both supported by a single budgetary authority, the ECB operates with nineteen independent budgetary authorities.
Maybe that’s what Christine Lagarde was thinking at her December 2021 press conference, when she Explain that it was necessary to move gradually towards a tighter monetary policy to avoid a “brutal transition”.
It is not surprising that this declaration provoked a icy response of the outgoing President of the Bundesbank, Jens Weidmann, a resolute supporter of budgetary orthodoxy. The new German finance minister, Christian Lindner, leans in the same direction. He valued that the ECB’s sensitivity to the cost of lending to over-indebted member countries could lead it to be excessively slow in ending stimulus measures.
In a way, Mr. Lindner is right. The ECB President is in no rush to tighten monetary policy, as she is keen to preserve the integrity of the monetary union as stimulus is scaled back. Like a conscientious doctor, she does not want to rush the withdrawal of a drug addict hooked on a highly addictive product. Make no mistake, the ECB’s stimulus measures have had a major effect on the European economy – to the point that it has become dependent on it.
You have 37.29% of this article left to read. The following is for subscribers only.