A year ago, at days of S’Agaró Luis de Guindos, Vice President of the ECB, told me that if inflation rose to 4%, “we are going to have a hard time.” Who is it? The ECB, which should raise rates? The Europeans, because of the risk of recession? The Spaniards, because Spain is more vulnerable due to its high debt? I think I remember a fleeting: “Everyone”.
A year has passed, the war in Ukraine has been going on for months and inflation has reached levels of 10%, more than five times the 2% that the ECB considers the inalienable objective to avoid the risk of economic ruin. But the disaster – some foresaw it in September – has not arrived. The European Commission published its forecasts this week and although it contemplates two quarters of negative growth (the fourth of this year and the first of 2023), it believes that the euro zone will grow by 0.3% next year. And Spain 1%. Almost nothing, but more than average. The European recession will only be “technical”.
But Guindos, perhaps the Spaniard who, because of his vantage point, has a broader perspective, was very cautious on Friday. And when Anna Balletbò, the soul of the conference, snapped at her with his well-known self-confidence that the ECB could not raise interest rates any further (two points in recent months), Guindos rebuked her: “I’m sorry Anna, complex months are coming.” Translation: interest rates will continue to rise, but we do not know how much or until when, everything will depend on the inflation data. And if it goes down for a month, like in October in America, it may encourage markets but not impress central bankers.
For Guindos, the Commission’s forecasts are significant because of the trend they mark. They get worse every time. We are going to lower growth, more inflation, rate hikes and growing uncertainty. In mid-2023, inflation will remain high (the Commission forecasts an annual average of 6%), there will be a (temporary?) recession, and the ECB will not be able to lower rates without losing credibility in its mission to anchor inflation at 2%. .
Inflation is not just supply (gas and commodity prices). There is excess liquidity and the proof is that banks do not need to raise their liability rates. And it is key that fiscal policy – the action of governments to protect the population (or lower taxes) – does not counteract monetary policy. When that happens (Great Britain) there is chaos that has caused Liz Truss was the shortest-lived British prime minister. And Guindos stressed, with concern, that 80% of government aid is not intended for the weakest but for the entire populationwhich contradicts the ECB’s policy and is harmful, because it hinders price signals.
But both Guindos and Pablo Hernandez de Cos, Governor of the Bank of Spain, separated from the ‘hawks’. The ECB will be cautious about reducing its balance sheets (for example, stop buying back maturing public debt). And they find it encouraging that the economies -not only the Spanish one- are being very resilient in terms of employment (it is higher than before the pandemic), which partly compensates for the loss of purchasing power.
The ECB is beginning to fear that in 2023, if the economy falls, governments will pressure it not to insist on its goal of reducing inflation to its 2% target
The big question is, if in mid-2023, with the economy falling, the pressure from governments will increase so that the ECB does not continue its objective of lowering inflation. Guindos did not delve into that assumption (the European governments -or some of them- against the ECB), but later John Cerruti, chief economist at Banco Santander, played it down. The ECB has to lower inflation by reducing growth and governments, protect their citizens. Voucher. Enrique Fernandezhis counterpart at CaixaBank, insisted that governments, in order to ensure social peace, subsidize the consumption of electricity and Rafael Domenech (BBVA) was more optimistic in the short term, but warned of the future risks of deglobalisation.
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In sum, 2023 will not be an easy year for anyone. And Guindos avoided the controversy with Pedro Sanchez: institutional respect for the president, but reaffirmation of the solvency of the ECB’s reports. Only at the end, in response to a question, was a minimum license allowed: “Germany can spend 200 billion in aid because it has a debt of 65% of GDP, other countries have more debt.” The Spanish is 113%. She didn’t say it.