The EU and the ECB are to blame for high inflation

By
Pieter Cleppe
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Newly released Eurostat figures reveal that public debt levels of the 20 member states of the Eurozone have now reached a record level of 88.7 percent of GDP, up from 88.2 percent in the previous quarter. Closely linked to this is speculation that the European Central Bank may well start cutting interest rates again, precisely to try to restrain these public debt levels, very much in the worst tradition of banana republics. In the end, savers then ultimately end up paying for loose monetary policy.

Ever since former ECB President Mario Draghi uttered the words in 2012 that his institution would do “whatever it takes (…) to preserve the euro”, market speculation that the political construct could collapse imminently was gone. Still, this concern has not completely disappeared, which is visible in the “spread” investors charge to Eurozone member states when lending to them. Only in June, this spread between France and Germany reached the highest level since 2012. This followed a ratings downgrade and political instability, which is ongoing, since no French government has been formed after the big defeat for President Macron in the European and the National Parliament elections.

Is the ECB about to loosen policy again?

Most economists that are closely following the issue expect the ECB to cut interest rates in September, according to a ZEW survey. That’s despite the fact that the Eurozone’s leading economy, Germany, is anything but in need to an interest rate cut. According to the so-called “Taylor Rule”, a monetary policy targeting rule developed by American economist John B. Taylor to help central banks set short-term interest rates in order to minimize inflation, the fair interest rate should be 5.75%. That is 150bps higher than the current rate of 4.25%, not lower.

A key reason for that is that “core inflation” in the Eurozone, which excludes energy and food, is still high at 3.3%, well above the 2% ECB target.

What’s more, the large increase in the cost of transportation per ship – also a result of the ongoing attacks by the Houthis on ships using the Red Sea route –  will lead to higher import prices, according to Kevin Thozet, member of the investment committee of fund manager Carmignac.

To say that ECB’s leadership is not exactly inspiring confidence, is putting it mildly. In mid July, ECB President Christine Lagarde warned that “extreme weather events, and the unfolding climate crisis more broadly, could drive up food prices.” That may well be, but obviously, it is a bit odd not to focus on the ECB’s loose money policies, serving to prop up spend-drunk European welfare states, but on the “climate crisis” that would be causing inflation.

Such comments are very much in line with the worrying degree of climate zealotry at the institution. Earlier this year, ECB top official Frank Elderson told ECB staff that if they were not green, they were no longer wanted, saying: “Why would we want to hire people who we have to reprogram?  Because they came from the best universities, but they still don’t know how to spell the word ‘climate.’” He added: “I don’t want these people anymore.”

The comments sparked outrage both within and outside the ECB, especially because of the use of the term “reprogram”, but Elderson, who last year even dared to intervene into an EU legislative policy debate on the nature restoration law, was not forced to resign.

Meanwhile, property prices rose sharply all over Europe, partly because borrowing became so much cheaper, due to ECB policies.

Not only the ECB is responsible

Loose monetary policies serve as a factor driving up prices, but of course, there are other factors as well. In Europe, the experimental energy policies are key here, but also newly protectionist measures, like the EU’s Carbon Border Adjustment Mechanism (CBAM), which will impose import charges on products such as steel, cement, and electricity, based on the carbon dioxide emissions embedded in their production.

Contrary to what some politicians try to claim, tariffs – like all sales taxes – are paid by the buyer, not the seller. European consumers will therefore ultimately foot the bill.

On top of that, there are the new, supposedly “green” EU regulations acting as yet another factor driving up prices for Europe’s already hard-pressed consumers. Recently, a new report by GlobalData revealed that the EU’s new deforestation regulation (EUDR), which imposes extra bureaucracy on all kinds of imports deemed to worsen deforestation may add $1.5 billion in compliance premiums for products like palm oil and rubber alone. Also here, consumers will pay the bill.

At the same time, this EU regulation is unlikely to effectively deal with deforestation. Already an estimated 93% of palm oil imported into Europe is sustainable and does not contribute to deforestation, while NGOs like Global Forest Watch have reported a sharp reduction in forest loss in countries such as Malaysia and Indonesia. The EU could opt to simply recognize Malaysia’s domestic standard to prevent deforestation, something which the UK does, but this was a “no go”.

The whole thing has not only upset trade negotiations with South East Asia, but also the United States has demanded in June that the EU should delay the implementation of the regulation. At least the European People’s Party (EPP), has already backed a two-year delay.

Conclusion

Inflation remains high in Europe, and EU institutions are very much to blame. The ECB’s monetary policy and the EU’s energy and climate policy have all contributed to upward pressure on prices. Thankfully, ongoing trade as well as technological innovation are factors exerting a downward effect on prices, but it is by no means guaranteed that these will be able to compensate for the ongoing refusal to abandon a number of deeply misguided EU policies.

 

 

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