[h=1]‘Catastrophe Christine’ is about to plunge the eurozone into recession[/h]
"Lagarde's record doesn't inspire much confidence as ECB prepares to raise interest rates
A quarter point? Or, as the markets are increasingly speculating, a more decisive half point? On Thursday, the European Central Bank (ECB) President Christine Lagarde will finally raise interest rates for the eurozone to bring rapidly rising inflation back under control. The only real question is by how much.
Sure, it is easy enough to understand that decision. Prices are going up everywhere, and monetary policy looks far too loose. The trouble is the zone's economy is in no shape to withstand the shock.
Business confidence is already collapsing, the currency has crumbled, a political crisis is brewing in Italy, and soon in France as well, while Russia is about to turn off the gas.
In truth, catastrophe Christine left a trail of carnage at the International Monetary Fund (IMF), and as France's finance minister. Plunging the eurozone into recession will be her latest disaster.
It takes a long memory to recall the last time the ECB raised interest rates. It was way back in 2011, when the economy was still recovering from the financial crisis, and there were signs of prices starting to rise.
That decision is now rightly viewed as a grave mistake, choking off any hope of a sustained recovery, and leading directly to the crisis of confidence that engulfed the zone through 2012, and almost led to Greece leaving the monetary union.
Ever since then, the Bank has kept rates at record lows, and printed money on an unprecedented scale. Indeed, its balance sheet, the best measure of the amount printed, has ballooned to more than €8 trillion, or 82pc of the zone’s GDP (compared with 36pc for the Federal Reserve and 39pc for the Bank of England).
On Thursday, that will change. The Bank has already signalled that it will start raising rates. A quarter point increase is most likely, with an outside chance of more.
After all, inflation is running at 8.6pc across the zone as a whole, driven by the soaring cost of energy and food following the war in Ukraine.
In some countries it has reached genuinely alarming levels. In Estonia it is up to 22pc, in Lithuania it is at 20pc, while in Greece, often the most unstable economy within the zone, it is above 12pc. It is hard for any central bank to look at prices rising at that rate and sit on its hands. Especially in Germany, the hawks are calling for decisive action to bring inflation back under control.
The trouble is that it will tip the eurozone into recession.
Figures out on Monday showed business confidence across the zone has collapsed to even lower levels than the UK, with the steepest falls in Germany and Italy.
The currency has already crumbled against the dollar, hitting the psychologically important level of parity with the dollar last week, and it may well fall a lot further over the next few weeks, taking it down to the lowest levels witnessed over the last 20 years.
Figures out on Monday showed business confidence across the zone has collapsed to even lower levels than the UK, with the steepest falls in Germany and Italy.
That will push up the cost of imports, and especially energy (all that liquefied natural gas Europe is scrabbling around for is priced in dollars), making inflation worse. Even more seriously, it will hammer the competitiveness of European industry at a time when it is already losing ground in global markets.
We saw the first signs of that when Germany slipped into its first trade deficit in 30 years this month, but it will get a lot worse over the next few months. There is a political crisis in Italy, with the prime minister Mario Draghi, about the only person who has held the euro together over the last decade, likely to be evicted from power very soon.
That may swiftly be followed by France and Germany: president Macron in France has already lost his majority in parliament and is struggling to pass any legislation, and chancellor Scholz in Germany is facing so much pressure over his party’s links to Russia he may not be able to hold his fragile coalition together much longer.
Perhaps worst of all, on Thursday, the same day that interest rates are set to rise, we will find out whether Russia switches the gas pipelines back on. If it doesn’t, and it is looking increasingly unlikely that it will, then Germany, Italy and even France will all have to impose some form of energy rationing. Factories will close, offices will go back to home working, and output will collapse as a mini-lockdown is imposed on economies that have barely recovered from the last one.
In reality, the eurozone was already facing a deep recession over the next year. That was inescapable. The very last thing it needs at this point is higher interest rates.
In reality, Christine Lagarde is a politically astute lawyer, but unlike her predecessor she is not an economist, nor has she ever worked in the markets.
As France’s finance minister under president Sarkozy she squandered the chance to push through his reforms of the economy, costing him the following election.
As managing director of the IMF she presided over a “solution” to the Greek crisis that caused the deepest recession in recorded economic history, while her poorly-timed ‘rescue’ of Argentina led to the biggest losses in the history of the fund.
It is hardly a record that inspires much confidence.
Right now, she faces perhaps the biggest challenge of her career. In truth, the ECB made a huge mistake when it raised interest rates prematurely after the financial crisis. It is about to make the same mistake all over again.
Rising rates as an economy faces so many challenges will plunge the eurozone into a deep and unnecessary recession, jeopardising the survival of the currency.
A more astute central banker would face down the inflation hawks, and keep rates on hold, confident that collapsing demand will be enough by itself to bring inflation under control.
The consensual, inexperienced Lagarde is unlikely to be brave enough for that – and the whole of the continent will pay a high price for Thursday’s monetary tightening."
https://www.telegraph.co.uk/business/2022/07/20/catastrophe-christine-plunge-eurozone-recession/
O texto é um pouco longo mas vale a pena ler, mostra bem o estado e a situação da UE atualmente e em quem está entregue a ardua tarefa de nos tirar desta situação.
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