Grandstand. To save the euro, the European Central Bank (ECB) was able to use for ten years, with extreme skill, a key element of its regulations: the inflation target was to be “less than but close to 2%”. While inflation was absent, a public debt monetization policy was thus able to be put in place, despite the treaties, on the pretext that low rates would contribute to a rise in prices.
Mario Draghi was a master in this area and Christine Lagarde very quickly followed in the footsteps of her predecessor. Throughout these ten years, the ECB has multiplied long-term loans to banks, sometimes at negative rates, and from 2015 it has carried out massive purchases of public debt.
Low rates, virtually administered, put an end to speculation by investors who used the pretext of differences in levels of public debt to cause interest rates to diverge. This monetary morphine was not specific to the euro zone, but it was particularly important there: the balance sheet of the ECB today represents two-thirds of the GDP of the monetary zone, while the balance sheet of the Federal Reserve (Fed) accounts for only one-third of US GDP.
The presence of inflation
The ECB’s valuable tool – referencing the inflation target to buy government debt – could disappear. For several months now, inflation has been making a comeback around the world. Christine Lagarde was betting that this phenomenon would be temporary but, faced with a price increase figure of 5%, she had to admit during the last Board of Governors that it was becoming less obvious…
Inflation is knocking at the door, even in the euro zone. Accommodative central bank policies have created money far beyond the needs of the economy, which is not unrelated to the global surge in prices for real estate, financial assets, commodities and now of certain goods with the risk of a price-wage spiral.
The pandemic crisis, by disrupting global supply in multiple areas, has added industrial imbalances to these financial imbalances. In the longer term, the energy transition and the aspiration to reconstitute national industrial bases could also be the factors of a lasting rise in prices (carbon tax, cost of labour).
The circulation of capital, a problem
Two other elements are darkening the sky in the euro zone: the gap in public debt levels within the zone has widened terribly over the past ten years and the circulation of capital has not improved. Public debt levels were the same in France and Germany when the monetary zone was created, still the same on the eve of the 2008 financial crisis (64% of GDP) and still very close the day after this crisis (88% in France, 80% in Germany).
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