The survival of the Government of Pedro Sánchez, like that of the rest of the eurozone, is going to be played out on the narrow playing field left by his political needs to deal with the effects of price increases on the income and resources of the citizens and the objective of the European Central Bank (ECB) of cooling down the economy to kill inflation at the root, which it considers to be runaway.
Governments know of no alternative remedy for social unrest other than public spending. Even the German Social Democratic Chancellor Olaf Scholz, who has already announced through his finance minister, the liberal Christian Lindner, a program to cut spending and reduce the public deficit, has devised a special mechanism to circumvent the limitations incorporated into the German Constitution. It is about creating special funds outside the budget for all kinds of purposes, social aid, climate change and even the increase in military expenditures. The difference is that in Berlin they think that they, unlike the governments of the south, do have fiscal space to do so. It is not fair to imagine that the federal State does not come to the aid of the economy most affected by the shortage and rise in the main sources of energy.
Although it is certain that in Germany there will be much more understanding, and even complicity, with the turn of monetary policy that Christine Lagarde will lead from now on in the ECB, it will not be easy to comfort the population with simple monetarist proclamations.
Make no mistake, the eurozone economy has been going downhill for weeks. Most of the indicators of its most important economies show decreases, in business and consumer confidence, in exports, in investment…
Except, again, in the case of Germany, in which in recent quarters wages had begun to rise, in the rest, such a thing has not occurred. Inflation in the eurozone is not the result of a runaway demand, except in the case of tourism, which may be the summer swan song before the descent into recession hell.
In this context, is the ECB right to start raising interest rates, bearing in mind that this policy will accelerate the decline in the economy? Isn’t it a mistake, like in July 2008, when he raised rates on the verge of the outbreak of the great financial crisis and the collapse of Lehman Brothers?
It is not a question of explaining to those experts in monetary policy what the consequences will be, they know them better than anyone. But they think they have no choice. In fact, both Lagarde and the president of the American Federal Reserve, Jerome Powell, or the governor of the Bank of England, Andrew Bailey, have already explained ad nauseam that their main mission is to tackle inflation and that they will not hesitate to raise guys as much as you need.
His view is that inflation is running amok because there is not enough product supply – as a result of bottlenecks in global production and supply chains, trade wars that have affected world trade for years, the post-pandemic recovery and finally the war in Ukraine – to meet the demand, although this is not to shoot rockets either. And the prevailing thought on the matter recommends in these situations to cool down the demand until lowering it to the level of supply. So, magic! There will be no inflation. The dilemma, critics point out, is whether, in addition, there will be no life either.
The economic conversation in the coming months will be polarized around those who defend that central banks should not aggravate the ills of the economy by making money more expensive and more scarce, when, moreover, their rate hikes do not affect world prices of raw materials, on the one hand; and those who postulate that inflation can end up rising until it completely destabilizes the economy and world trade.
And in the political sphere, it will take the form of tensions and cross-declarations and risqué between the ministers of the branch, in the Spanish case, Vice President Nadia Calviño, and the governors of the national central banks, for our part, Pablo Hernández de Cos.
The hopes of both sides are focused on the fact that the worst of the increase in prices has already manifested itself – those of gas and oil could not continue to rise indefinitely – and from now on they will stabilize, with which inflation would have become a more expensive cost of living, but it would not continue to rise or it would do so less vigorously. This scenario would allow a moderate rise in interest rates, which would not have excessive consequences for the economy.
But the reality will probably be harsher and central banks will undertake progressively more aggressive hikes out of fear of inflation. If only to prevent their currencies from weakening against the US dollar and through that route, that of more expensive imports, there is even more price inflation. All that, after the summer; Now, to trust in tourism.
