Why the high interest rates of the ECB are not stopping inflation: the Italian strategy against the risk of recession

The restrictive monetary policy strategy of the European Central Bank is less and less convincing. On the moves of the institute led by Christine Lagarde The doubts of some governments and parts of the European industrial world are increasing. In particular, Italy is concerned with Confindustria which openly criticizes Frankfurt and Giorgia Meloni’s government, in continuity with Mario Draghiwhich pushes on the Italian member of the executive committee, that Fabio Panetta already courted by the Prime Minister to be the Minister of the Economy, for alleviate the possible recessive effect.

In short, the danger is that, since the rise in prices is mostly driven by a exogenous factor such as the energy crisis, the depression of demand and investments induced by the rise in ECB interest rates, without a definitive European intervention on gaslead to a negative spiral only, without reducing inflation.

Also, at a time when public debts continue to rise to try to support families and businesses, the Bank is concerned about the reduction in purchases of public securities, albeit with the flexibility guaranteed by the new anti-spread shield, which will replace Quantitative easing. The battle, as usual, is between Southern European countries and northern hawksoften supported by the Germany.

The defense of Lagarde

Lagarde reiterated that the ECB is focused onobjective of price stability And “will reach him“, using “all available tools“. For the president “everyone has to do their job. Ours is to maintain price stability, and when inflation moves away from the 2% target as it is now, our duty is to tame it.“. From the series: we use the classic instruments of monetary policy e it is up to European governments to prepare any expansionary budget policieswith new mutual funds and moves to reduce speculation.

According to the president, the choices of the ECB “they will not reduce the price of gasoline in one day, that is about 40% of inflationnor will they remove obstacles to production chains, but our primary task is stop any monetary accommodation that stimulates demandespecially those launched during the pandemic“.

Panetta’s advice

Panetta, however, spoke publicly, preaching prudence. Opening the Ecb Money Market Conference in Frankfurt explained that “the calibration of our position must not hinge on a one-sided view of risks“: Otherwise the tightening of the ECB could”to cause too much volatility in the markets and a protracted economic slowdown beyond what is needed for stabilize inflation in the medium term“.

According to the Italian economist, in calibrating the normalization of monetary policy, “we will have to carefully consider the resilience of our economythe impacts of global monetary decisions, and emerging threats to financial stability“. It is therefore a question of maintaining a difficult balancebetween inflation to be reduced and “downside risks to economic activity“.

Also for Panetta when the ECB will decide to reduce the portfolio of government bonds acquired in recent years with the Quantitative easing “one is preferable controlled reductionin which only bonds maturing beyond a certain level are not reinvested, compared to actively conducted sales that they could destabilize the markets in an already volatile financial climate“. In short, what should be avoided “it is a sudden interruption of credit to the economy“.

Meloni’s trip to Brussels

Meanwhile today Meloni is in Brusselswhere he meets the president of the EU Commission Ursula von der Leyen, also carrying the cry of suffering of the Italian industrial world. According to the number one of Confindustria, Carlo Bonomideal with inflation “only with the rate hike, as is the Fed in America, it’s wrong: their price hike is due to growthwhile ours is imported because it is due to the energy crisis“.

Meloni also saw the Commissioner for Economy at lunch Paolo Gentiloni. Not a pleasure meeting: the goal is to try to bring the Commission to Italy’s side despite the fact that the government is not well seen by most European chancelleries. To intervene with a new common budgetary policy against expensive energy and for limit hawks within the ECB. The latter is formally a independent bodybut talks with other EU bodies are on the agenda.

According to Joachim Nagelpresident of the Bundesbank and ECB adviser, the anti-spread shield announced by the ECB would not be a tool “made to finance some countries“. Nagel, according to Bloomberg, would have added that the Central Bank cannot refrain from raising interest rates against inflation. If we add to this the statements of the vice president of the EU Commission, Valdis Dombrovskisaccording to which “this is the time for prudence in budgetary policies“It is clear that Meloni will have a lot to do to try to steer the route of the Italians in favor of Italy European economic policies.