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Faced with record inflation in Europe, at 9%, the European Central Bank must once again raise its interest rates. Its decision will be announced on September 8, once the Board of Governors has resolved its dilemma: should they be increased sharply or not, at the risk of aggravating the looming recession?
The other major central banks have already decided. On September 7, Canada raised its rates sharply, by three-quarters of a point. In the United States, the Federal Reserve has already given a tightening of this order in July and is about to start again. After procrastinating for a long time, here is his credo : it is better to act quickly and strongly before it is too late, even if it leads to a recession. Because once the spiral of rising prices and wages is engaged, it is much more complicated to stop it. Western countries still remember the incompressible inflation of the 1970s.
What makes the decision more complicated in the euro zone?
A rate hike of 0.75% is unheard of for the ECB. It generally acts with great caution because the euro zone is still very fragmented, with economies robust enough to withstand shock treatments and others still convalescing. A sharp rise in interest rates will weaken the most indebted countries. Ten-year rates in Greece and Italy are already around 4%, three times the rate in Germany.
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Entangled in war and the energy crisis, the euro zone cannot afford the luxury of a new debt crisis. The ECB has a new tool to intervene in the event of a problem, but it will first do everything to avoid lighting the fire itself. Germany’s representative on the board of governors calls for a big hike verbally while the Greek pleads half voice for moderation.
The ECB must also take into account the very wide range of inflation.
The European average exceeded 9% in August, with countries less affected than others. In France, it is around 6%. A relatively moderate rate thanks to the energy shield. But it exceeds 25% in Estonia where the price of energy replicates the prices of gas and electricity. The Estonians, frightened by Russia’s aggressiveness, are stoically supporting this surge, paying a high price, because their purchasing power is well below the euro zone average.
According to the European Trade Union Confederation, the share of energy in the average income has increased by more than 20% in 14 European countries. In Estonia, for example, it almost doubled. In Greece, energy absorbs 10% of the annual salary, ie more than a month’s salary.
Does the ECB take into account the decline in purchasing power?
Its primary mission is to limit inflation to the 2% zone, not to monitor purchasing power. But the governors watch carefully how this inflation forms. And they find that, unlike the United States, it is not the explosion in post-Covid-19 demand that explains the runaway prices in Europe, but the energy crisis, the boom in oil and gas, among other things because of the Russian war.
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This is why the effect of raising rates by 0.75% will not necessarily be effective on this imported inflation. To control it, it is the governments that are in charge, with price shields, which are very expensive, hence the idea of a tax on superprofits. And with a European policy, which will be decided on September 9 in Prague during this extraordinary Council devoted to energy.