Another report turns upside down the strategy of the European Central Bank (ECB) to fight inflation. An academic investigation recently published shows that the increases in official interest rates between 2022 and 2024 have been “incoherent” with the origin of the price crisis and that they have harmed the most vulnerable families in the eurozone the most, and especially the most vulnerable families of Spain and Portugal with respect to households in Germany, France and the rest of the economies in the center and north of the region.
“Containing wage growth has been the main objective of monetary policy in the last two years,” say Vicente Ferreira, economist at the Sapienza Univesità di Roma, and Alexandre Abreu and Francisco Louçã, from the University of Lisbon, in their paper ‘. “In mid-2022, when the ECB began raising interest rates, the main argument in favor of monetary austerity was that the risks of an unanchoring of expectations among those responsible for setting prices [las empresas] and salaries [los trabajadores] were increasing, and the central bank had to stop them [a los sueldos] to avoid an inflationary spiral,” these experts continue.
According to their calculations, at the beginning of 2023, the minutes of the December 2022 meeting of the ECB governing council included 52 mentions of the word “salary”, while terms such as “profit” or “profit margin” appeared only once. time. “Wage growth was pointed out as a key explanation for the persistence of inflation,” these economists lament.
Ferreira and her co-authors – Louçã was leader of the Bloco do Esquerda of Portugal and Abreu was a candidate in the last European elections of this same party – follow the line of the German economist Isabella M. Weberwho already in 2023 demonstrated that in the United States there has been what she calls “seller inflation [sellers’ inflation, en inglés]”. Their finding confirmed that companies were passing on cost increases (especially energy costs) to sales prices, increasing their profit margins and amplifying the inflation crisis. Just a few months ago, also based on their work, Jorge Uxó, Eladio Febrero and Nacho Álvarez concluded that this inflation due to greed has also occurred in our country.
But the vision that has been imposed on the central banks has never been that, but rather the more “orthodox” one, dictated in the ECB mainly by the German representative on its executive committee, Isabel Schnabel. This perspective has insisted on achieving inflation stability at the theoretical target of 2%, assuming the risk of stifling activity and causing a recession and the destruction of jobs.
“Although the central bank recognized that supply shocks [sobre todo la escalada de los costes de la energía por la salida de la pandemia y la invasión rusa de Ucrania] were the most important factor in the initial price pressures in the eurozone, […] following the example of the Federal Reserve [Fed] American, the ECB raised the interest rate on its deposit facility [que se traslada automáticamente al Euríbor, el índice de las hipotecas, y al resto de préstamos] from 0% in July 2022 to 4% in September 2023, taking the ‘price’ of money to historical highs in the monetary union,” says the report, titled ‘Inflation rise and fall in the euro zone (2021-2024): a heterodox perspective’.
“This turn towards hardening [o austeridad] monetary policy was based on the hypothesis that the inflationary episode was driven or significantly amplified by aggregate demand [el consumo, el gasto público y de las empresas…]thus justifying the actions of central banks to stop investment and employment,” he adds. With the positive exception of Spain for various reasons, the ECB has achieved its objective. Eurozone GDP grew only 0.4% in 2023, from 3.4% in 2022, and forecasts for 2024 have been revised downwards in recent months until they remain at 0.8%.
“The rise in inflation was not associated with excess demand or so-called labor market rigidity, as consumption and investment remained largely below the pre-pandemic trend and wage growth remained moderate. in 2021-2022. Furthermore, the fall in inflation from mid-2023 […] has not been boosted by the cooling of the labor market, as unemployment levels remained considerably low during this period. This suggests that the true roots of the inflationary outbreak lay elsewhere: specifically, in the limitations and supply bottlenecks that arose in the context of the economic recovery after the pandemic,” the experts summarize.
More damage to the poorest
The palpable consequences for families must be sought beyond the macroeconomic impact. According to the researchers in the ‘paper’, “monetary austerity tends to increase income inequality” among households. “On the one hand, raising interest rates means increasing the income derived from holding financial assets, that is, it increases the income of a typically richer rentier class,” they argue.
“On the other hand, monetary tightening harms lower-income households, as they tend to be more in debt relative to their income. Furthermore, it should be noted that the objective of raising interest rates is to reduce aggregate demand to reduce inflationary pressures from an overheated economy. This is achieved by restricting economic activity and increasing unemployment, which tends to disproportionately affect low-wage workers,” they explain.
The report cites other research that argues that “inflation targeting monetary policy [es] a de facto long-term income policy.” And the truth is that “empirical data suggest that most of the ‘excess savings’ accumulated during the first two years since the start of the pandemic corresponded to households in the highest income quintile, that is, 20% of families with more income.”
Different impact in Germany than in Spain
“The core-periphery nature of the eurozone is of crucial importance to understand how shocks have asymmetric impacts” on the different partners, the research deepens. Economists place Germany, France and the rest of the center and north of the region, the richest, in the “core.” And in the peripheries, Spain, Portugal, Italy and Greece, on the one hand, and the eastern countries, on the other, poorer and more indebted.
Firstly, the inflationary outbreak had different repercussions on the different euro economies. “To some extent, the energy crisis appears to have affected countries beyond the core-periphery divide: Germany (core), Italy (southern periphery) and the eastern countries were hardest hit by rising gas prices. and oil, due to their dependence on fossil fuel imports from Russia and the structure of their economies, with a higher proportion of energy-intensive industries than the rest of the eurozone,” they comment.
However, the impact of the ECB’s monetary austerity was experienced differently in the core and periphery of the eurozone. “There are at least two channels” through which this occurs: different debt/GDP ratios; and different percentages of variable rate mortgages,” observe the economists.
The first channel is related to the level of public debt. Monetary restriction has a greater impact in countries with higher debt-to-GDP ratios through an increase in debt financing costs. “Although southern periphery countries attempted to reduce their debt ratios both before and after the pandemic, this group remains generally more exposed to changes in financing conditions than most core eurozone countries.” , they influence.
In 2023, Italy, Spain, Portugal and Greece were among the six most indebted countries in the monetary union, along with France and Belgium, and well above countries such as Germany, the Netherlands or Austria. This means that, in general, the core countries are in more favorable conditions than those of the southern periphery when it comes to financing public services and promoting investment.
The second channel refers to household debt. Increases in interest rates have different repercussions on the disposable income of households by affecting mortgage costs. “This impact differs between eurozone countries due to the proportion of variable rate mortgages [que se revisan periódicamente respecto al Euríbor y que son cerca del 70% del total en nuestro país]. Households in countries such as Portugal, Estonia or Spain faced an increase in interest rates close to or greater than 1% of their country’s GDP, while those in countries such as Germany, France, Belgium or the Netherlands experienced an increase in interest rates. mortgage costs less than 0.2% of GDP,” they point out.
Ferreira, Abreu and Louçã conclude: “Given that supply shocks are likely to become more frequent in the future, due to the effects of climate change and geopolitical issues, there is a pressing need to rethink the policy response to inflation in the eurozone. Instead of relying on the blunt instrument of interest rates to curb inflation at the expense of economic activity and employment, the focus should be on preventing price shocks arising from sectoral supply constraints, both through investment to improve national productive capacity in these sectors and through the design of measures to curb the pricing power of large companies.”
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