2023-08-31 21:28:01
Vice President of the European Central Bank (ECB), Luis de Guindosassured this Thursday at a seminar organized by the Menéndez Pelayo International University that We are in the “final stretch” of interest rate hikes.
“We are entering the final stretch,” said De Guindos, although he has warned against second-round effects and inflation expectations, so he believes that the rate decision in mid-September is it still “open”.
De Guindos has indicated that the rise in rates is already tightening financing conditions, which is leading to a drop in the demand for credit. The former Minister of Economy recalled that monetary policy decisions are expressed with a “delay” of between 12 and 24 months.
De Guindos has highlighted the negative effects of inflation, which he has described as “absolute evil for economic and social life” because of the impact it hasabove all, in the segments of the population with lower income, since they consume more and purchase more products.
In this way, it has defended the policy of raising interest rates as a “bitter medicine, but a necessary medicine” for the economy to heal and grow again. “The best contribution that a central bank can make, without a doubt, to the future of economic activity is to reduce inflation,” summarized De Guindos.
In line with the above, De Guindos has also valued the expansionary intervention of the ECB during the pandemic, since the support for liquidity prevented “the collapse [del sistema] was far superior.”
However, as the economy reactivated and the war in Ukraine broke out, the executive has acknowledged that economists were wrong to believe that inflation would be “temporary”, which led to a subsequent monetary tightening to stop it.
Economic Situation
The former minister has indicated that the potential downside risks for growth “they have been concretizing”, since the indicators for July, August and the advanced ones “point to a slowdown” in the third quarter and, “certainly”, also during the fourth. De Guindos has argued that, at this time, the slowdown in the economy is more “visible” than that of inflation.
The Spanish has considered “important” to use “common sense” when it comes to resuming the adjustment plans and indebtedness reduction through the containment of the public deficit. Thus, it has considered the previous objective of 60% public debt to be unrealistic due to the divergence between the debt levels of the different States of the European Union, for which reason it has shown itself in favor of a review of the objectives that imply a “middle ground” where “everyone has to give in.”
As for China, De Guindos considers that the impact of the instability resulting from the difficulties of the Asian giant’s real estate sector on the European economy does not derive from a “direct” exposure of European financial institutions to this sector, but, fundamentally, due to via “indirect” as a consequence of the slower growth of the world economy.
On the other hand, De Guindos predicted that “in the coming weeks or months” Spanish banks deposits will begin to be remunerated and online savings with their European peers “how could it be otherwise”. The vice president of the ECB has explained that up to now this has not happened due to a lack of competition, but due to “excess liquidity” that is already disappearing.
Public aid and digital euro
De Guindos has rejected that “the most powerful countries” and that have greater fiscal margins invest in their companies and grant “competitive advantages” that other countries cannot match due to the lack of healthier fiscal positions. The Spaniard has advocated for the return of public policies to their original spirit and for there to be a “competitive market” in Europe in which “everyone has the same possibilities.”
Regarding the Next Generation Funds of the European Union, De Guindos has celebrated that they contributed to “breaking a kind of taboo”, since they were granted as transfers to the countries, and not as loans.
De Guindos has also referred to the digital euro to ensure that it will be a method of payment, not an investment, useful to ‘keep crypto assets and ‘stablecoins’ at bay. Likewise, he recalled that cash will not disappear, since there are countries like Germany where it has a notable presence or because of the potential constitutional amendment that is intended to be introduced in Austria to shield its circulation.
ECB idiosyncrasy
De Guindos explained that, although the ECB is in charge of monetary policy and supervision of the euro zone, it differs from other central banks due to the financial fragmentation derived from the existence of different sovereign nation-states.
“It’s not always easy when you have 20 Member States because you also continue to have national interests and you continue to have divergences from the national point of view,” he elaborated.
In turn, De Guindos has described the governance of the ECB as “curious”, since in its Governing Council, each member has one vote. “The vote of the Spanish governor is identical to the vote of the governor of Malta”, has exemplified De Guindos, who has described this system as “extremely democratic” and designed to safeguard the “general interests”.
The Spanish has opposed this model to the European Council, where the vote is weighted based on factors such as population, so that large countries can “impose from time to time what their approaches are”.
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