Absolute chaos prevails on the European economic and political scene, as countries disagree with each other over measures to deal with the energy crisis, monetary and fiscal policies cancel each other out, recession is a given, war is on the border and rising far-right, Eurosceptic and populist parties in many countries.
The two main tools of economic policy, monetary policy carried out by central banks and fiscal policy carried out by governments, are in an unprecedented contrast in Europe.
On the one hand, the European Central Bank follows a restrictive monetary policy by raising interest rates in order to tackle inflation, on the other hand, governments give money in the form of subsidies to cover the increased spending of households and businesses due to the jump in energy costs.
The “conflict” of the two politicians is a very rare, if not unprecedented situation for European data, and no one knows what the result will be. The reason for this contrast is mainly due to the nature of the inflation we face today.
The nature of inflation
The prices of all products are not increasing due to excessive demand from consumers, but due to an increase in their production costs due to the energy crisis. Therefore, the increase in interest rates cannot limit consumption and increase e.g. saving as it would if inflation came from excess demand. But it reduces incomes, since citizens and businesses have to spend larger amounts to service their loans.
On the other hand, when the government gives money in the form of subsidies it limits the action of raising interest rates and the whole policy mix cancels each other out. What’s worse is that while raising interest rates cannot work against inflation, it can cause a recession in the economy. In some cases, not only does it not lower prices, but it pushes businesses to keep prices high to cover in addition to the high cost of energy and the extra cost of servicing their loans.
The nature of the inflation-targeting interest rate (the nature of monetary policy)
Christine Lagarde of the ECB has described her monetary policy as an attempt to find a “neutral interest rate”. An interest rate which will not favor growth, but neither will it cause a recession. According to economists, this interest rate will be somewhere around 2%-3% and based on this, bank interest rates for businesses and households will be formed, which will reach much higher than they are today.
Even if the ECB manages to locate the neutral rate, the European economy will go into recession, Trust Economics estimates, but inflation will not be tamed because it is not related to interest rates. They will simply close businesses, increase unemployment and impoverish citizens who have loans.
To this criticism Ms Lagarde responds slightly apologetically: “Our primary objective is not to limit growth, our primary objective is not to send people to the unemployment fund, our primary objective is not to cause a recession, our primary objective is stability of prices and we have to have an effect on that, because if we don’t, the effects on the economies will be worse.” In short, Lagarde admits that we will have a recession and unemployment because the primary objective of the ECB (and indeed the only one based on its statute) is price stability, i.e. the fight against inflation.
So although Lagarde apologizes for the effects of her policy, she does not explain how this kind of inflation will be dealt with by raising interest rates. Nor how will raising interest rates work if fiscal policy gives allowances.
The nature of fiscal policy
With regard to the fiscal policy that governments carry out in the context allowed by the E.U. through the Commission, the margins are a matter of overall political decision of the countries of the European Union. There is no unanimity, not even consensus, on what exactly needs to be done – what is being found is that the North-South disagreements have now been transferred to the European policy arena to deal with the energy crisis. Greece together with France and a total of 15 EU countries they asked the Commission to raise the issue of a ceiling on the energy prices that Europe pays for obtaining natural gas, but the Commission refused to raise such an issue. The reason is that the Germans don’t want it, because that would change the balance within the EU. at their expense.
The issue now is that some countries benefit much more from the subsidy system, while others less, and that some countries demand more independence in their fiscal policy so that they can give more to meet the needs of poor citizens, which some other powerful countries do not they wish
In any case, what prevails today in the E.U. it is a chaos of opinions, a hard bargain of power, a different economic policy that one part cancels out the other and a lack of cohesion and understanding between the states that is not at all conducive to dealing with the problems.
And all this, while we clearly have a boycott (destruction with explosives) of the Nord Stream 2 pipeline, while Russia is escalating its war campaign with conscription, while Turkey is threatening the European borders, while in many countries there is an increase in the popularity of far-right, anti-systemic, Eurosceptic and populist parties.
