person of the week
Christine Lagarde, the mother of inflation
By Wolfram Weimer
05/24/2022, 10:30 a.m
The European Central Bank has speculated. Instead of fighting rampant inflation at an early stage, the ECB continued to flood the markets with new money even after the outbreak of war. ECB President Lagarde is delaying rate hikes, making the problem worse week by week.
Now it is 8.8 trillion euros. The balance sheet total of the European Central Bank (ECB) reached this breathtaking, historic record at the end of May. Although inflation is raging in Europe, the European Central Bank is still flooding the markets with new money. Since the beginning of the year, 250 billion euros have been added. The war in Ukraine has already dramatically worsened Europe’s inflation problems.
ECB President Christine Lagarde is responsible for the largest money creation in EU history. For months she brusquely brushed off warnings and appeals to finally end the excessive money printing. Inflation is only a temporary phenomenon, special factors such as the pandemic or supply chain problems are to blame, everything will soon normalize. Then it was said that the war had made inflation dangerous in the first place. The inflation rate had already reached its highest level in decades in January before the war broke out.
Since taking office at the end of 2019, Lagarde has been pursuing an extraordinarily aggressive policy of increasing money in financial circles. At the end of 2019, the ECB had total assets of 4.7 trillion euros. Now, two and a half years later, it has reached the fabulous 8.8 trillion. That means: Under Lagarde, the ECB creates 137 billion euros in new money every month, and an additional 4.6 billion every single day. A stock exchange trader in Frankfurt comments: “No wonder that all that money is now rapidly depreciating and inflating.”
Lagarde’s flood of money should make it easy for France and the southern European countries to refinance the high debt and mitigate the consequences of the pandemic. At the same time, however, it drove the stock and real estate markets into a speculative boom, but above all it triggered enormous inflation. In April, consumer prices in Germany and Europe rose by 7.4 percent each. This means that inflation is higher than ever before in the European currency area, and inflation in Germany has reached a forty-year high.
Huge redistribution
The rapidly rising prices not only burden millions of consumers, especially those with low incomes. At the same time, German savers are abruptly expropriated because inflation quickly eats up what they have saved. Lagarde, on the other hand, seems to have the interests of the over-indebted euro countries in mind. Because the devaluation is a blessing for them. A huge redistribution of savers to the states has begun, economists call the effect “inflation tax”.
As protests against the ECB’s inflationary policies grow ever louder, Lagarde has finally agreed to change course – albeit in slow motion. First of all, she only announces that the additional money creation is to be phased out in the summer. The ECB President writes in a blog on the central bank’s website that net asset purchases are expected to end “very early” in the third quarter. And: “Based on the current outlook, we will likely be able to end negative interest rates by the end of the third quarter.” With these statements, Lagarde also ruled out a 50-point rate hike in July – as well as a dual decision in June that could have included the end of bond purchases and a first rate hike. This is exactly what many experts on the fight against inflation had called for. But now, with the unusual blog, Lagarde has also decided to go it alone in slow motion in terms of communication – that too should annoy some council members.
For many analysts, the about-face is too tentative and too late anyway. “She has thrown four trillion euros of new money into the market and is now wondering about inflation,” said a CDU member of the Bundestag. A wide circle of companies, banks, trade unions, politicians, associations and scientists have been accusing the central bank of inactivity for months. According to the savings banks, the currency watchdogs fueled the inflation themselves. In doing so, the ECB is violating its central mandate to ensure price stability. In particular, it is causing resentment that the key interest rates have still been kept in negative territory to this day. The central bank’s deposit rate, which applies to bank deposits with the central bank, is currently minus 0.5 percent. The main refinancing interest rate, which for a long time was considered the key interest rate but has been overshadowed by the deposit rate in recent years, is on the zero line. While the Fed in the US initiated the monetary policy turnaround earlier and decisively, Lagarde is playing for time.
Ban on speaking for critics
The EPP, the largest group in the European Parliament, has been warning Lagarde for months that citizens will lose confidence in monetary policy if high inflation “robs them of monetary value month after month”. The inflation tax effect is politically explosive because millions of citizens would be coldly expropriated here without democratic legitimacy. In Germany, there are increasing numbers of voices accusing Lagarde of one-sided politics of interest. The demonstrative resignation of the Bundesbank President and inflation critic Jens Weidmann is a beacon.
In order to prevent internal criticism, Lagarde imposed an internal ECB gag order on communication in April. Criticism by individual currency watchdogs of interest rate decisions should be prevented so that the credibility of the ECB is not damaged. But that infuriated critics even more about the president’s stubbornness.
Your criticism of cryptocurrencies is also perceived as a misjudgment and a signal of weakness. Lagarde said on Dutch television: “My very sober assessment is that cryptocurrencies are worth nothing, that they are based on nothing, that there is no underlying asset that acts as an anchor of security.” In the financial scene, it is pointed out that the boom in cryptocurrencies is actually an indication of the growing distrust of many investors in conventional currencies, which can inflate for political reasons. In addition, the ECB under Lagarde did not manage to finally implement the announced digital euro. Lagarde counters dryly: “The day we release the central bank’s digital currency, a digital euro, I will guarantee that the central bank will stand behind it.” But how attractive is a digital euro that is inflating just as quickly as the analogue euro is currently?