Finance professor Teodoro Cocca from the Kepler University Linz (JKU) explains why the European monetary authorities have lost credibility in the past twelve months, but why the rising interest rates do not pose a risk of a new debt crisis for the heavily indebted countries.
OÖNachrichten: The European Central Bank (ECB) increased the key interest rate again at the beginning of February and indicated that it was not the last rate hike. On the other hand, the economy is weakening. What leeway does the ECB have?
Theodore Cocca: The ECB has cut a very bad figure in this phase of inflation. She was late at every stage. At first it downplayed the risk of inflation. Then it started raising interest rates too late. And now it wants to be particularly aggressive in fighting inflation, although there are already signs that inflation has peaked and will soon fall because the economy is weakening and energy prices are falling. Ms. Lagarde in particular has lost a lot of credibility in the past twelve months.
How will Ms. Lagarde proceed? Don’t we need further rate hikes like the announced increase of more than a quarter of a percentage point?
But. But the rhetoric, which was suddenly so aggressive, soon does not match the economic reality. Current plans envisage raising interest rates well into the summer. That could quickly be too much and would confirm once again that the ECB is lagging behind. The ECB’s current compulsion to adopt a particularly aggressive tone is due to past hesitation and is not a sign of strength.
Does that mean the ECB is hanging on to the US Federal Reserve and is always a step too late?
Exactly. Measured against the most important goal of a central bank – combating inflation – the ECB gets a bad report. It’s the classic: hesitant waiting at the beginning pays off in the long run. One is then forced to raise interest rates further in a weakening economy. The core of combating inflation is to act as early as possible, because the measures only take effect with a time lag. It’s in every textbook. Now inflation is stuck in our minds. That would not have been necessary. But when Ms Lagarde says inflation came out of nowhere, one has to wonder what she is thinking. It is already clear that Russia’s war against Ukraine accelerated development, but was by no means the cause of inflation. You can see that in the rising core inflation.
The ECB printed massive amounts of money by buying government bonds.
If I do what I may have good reason to do, I must pay the utmost attention to any flare-up of inflation and react immediately. But the ECB classified it so wrongly, it was a serious mistake.
Ms Lagarde is doing less well than Mr Draghi and his predecessors, or does the ECB have a tradition of poor leadership?
The ECB has consistently failed to do two things: to prove that it acts politically independently and that fighting inflation is its primary goal.
What is your ultimate goal?
Holding the eurozone together thanks to affordable mountains of debt. This is also a noble goal, but it is not in their statutes.
Isn’t the ECB doomed to be a substitute economic government because the EU Commission didn’t live up to this claim?
Yes, yes. But trained monetary politicians should already know the dangers of an ultra-expansive monetary policy. Namely, an enormous loss of prosperity among the population.
What are the effects of rising interest rates on the heavily indebted countries of Southern Europe?
That’s not a problem yet. The money is borrowed for the long term, and it will take many years for the increases to have a noticeable impact on the overall interest burden. Above all, however, the ECB has extended its protective hand over the weak euro countries in order to avoid panic and prevent interest rates from rising more sharply.
The bill is not paid by the states, but by the citizens.
Put it this way: Inflation is a tax to support the euro. This support can be useful. The only question is whether ten percent of our wealth is the right price for it.
What effects does inflation have on the competitiveness of an economy?
You can see a debt-financed subsidy competition to compensate for the loss of purchasing power. At least some of this is consumer spending on credit. In the long term, this reduces a country’s competitiveness because money is not invested where it will create prosperity in the long term.
We also imported inflation because the euro was so weak. Now he’s stronger again, why did that turn?
Because the winter in Europe was milder than expected. In the long term, the euro tends to be weak because the country’s mountain of debt has not decreased.
New OÖN podcast
From now on, OÖN economics department head Dietmar Mascher will be speaking every 14 days with experts from the financial world in the podcast “Money and Life” about tips and tricks on all aspects of investing and finance. Teodoro Cocca was the guest in the first episode and gives advice on getting started with investing in securities:
Author
Dietmar Mascher
Deputy Editor-in-Chief, Head of Economics
Dietmar Mascher
