Luis de Guindos, Vice-President of the European Central Bank (ECB), former Spanish Minister for the Economy, recognizes that the euro zone is entering recession but insists: inflation is such that the monetary institution is obliged to continue to raise interest rates.
How would you describe the economic situation in the euro zone today? Are we in a recession?
Indications for the fourth quarter suggest that we may be in negative territory, albeit mildly, with an expected contraction in GDP of 0.2%. The leading indicators we have are not good. According to our projections, the euro zone should thus enter a mild recession in the last quarter of this year as well as in the first quarter of 2023, when GDP is expected to contract by 0.1%.
On this basis, why is the ECB tightening its monetary policy? On Thursday, December 15, you increased the deposit facility rate by 0.5 points, to 2%, while Christine Lagarde, in her press conference, announced several new rate hikes in 2023. Don’t you risk to accentuate the recession?
Look at our inflation projections. We published our projections in September and then again in December. Between these two years, our growth forecasts have not changed much: they are a little better than expected for 2022, with an upward revision, from 3.1% to 3.4%, a little lower for 2023 , with a downward revision, from 0.9% to 0.5%, and identical in 2024, to 1.9%. The substantial changes, however, concern inflation, which has been revised upwards quite significantly, from 5.5% to 6.3% for 2023 and from 2.3% to 3.4% for 2024.
Yes, but inflation seems to have peaked. In the euro zone, it fell from 10.6% in October to 10.1% in November. With commodity prices falling, this trend should continue…
We believe that over the next two or three months inflation will remain around the current level, then in the second quarter of next year it will actually decline, to around 7% in the middle of the year. ‘year. But this remains clearly above our price stability target of 2% inflation over the medium term. We have no choice but to act.
But you act by stifling what little growth is left…
Monetary policy works by dampening demand, which dampens growth, there is no other way. But if we did nothing, the situation would be worse, because inflation is one of the reasons for the current recession. It reduces household disposable income and particularly affects the most vulnerable people. By reducing inflation, we will contribute to growth.
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