A peste, fame, et bello libera nos domine, said a medieval ejaculation that seems to be making sense in 2022: “From plague, famine and war, deliver us, Lord”, people implored, stalked by disease, war and lack of food.
Several centuries later, Europe is suffering from a new wave of the pandemic; mortgages go up; Filling the tank of the car costs almost 100 euros; the food crisis is raging with African countries. And Brussels fears that there will be no Russian gas to heat the houses of the Germans in the coming winter and wants special powers to compulsorily ration gas among the 27. The ECB raises interest rates twice as much as announced. And the war is going to take a long time, as recognized by European and community leaders and NATO itself, as much or more as runaway inflation.
The EU had not seen another like it. A war on the EU border, which hits the eurozone squarely with an escalation in prices that is not only the result of the expansive demand of a citizenry with savings that comes out of the pandemic. It also has to do with the Russian invasion of Ukraine, the energy battle, the gas crisis, problems with supplies... Something, all of this, that the European Central Bank had not had to deal with in the past either, which This Thursday has inaugurated a new era, after 11 years without touching rates, and with the highest rise in the last 22 years.
If this Wednesday the European Commission proposed a linear reduction of 15% in gas consumption in the EU due to the fear that Vladimir Putin will close the gas tap, due to the anger of countries such as Spain and Portugal, this Thursday the ECB has taken a decision that changes the course of a story that, in reality, is new for everyone.
The ECB has decided to double the bet and raise rates by 0.5 points, double what was announced a month ago. Why? The latest inflation data has weighed on the ECB, which marked a new record in the eurozone, with a rise in prices of 8.6% in June, breaking the previous month's record by half a point.
And in exchange for satisfying the hawks with that rise of 50 basis points, the ECB has unanimously agreed on an instrument against threats to risk premiums, the TPI, an instrument of slight conditionality that the ECB can activate from now on in the face of problems to place the debt of countries such as Italy, Greece or Spain.
But what will come first? At the ECB they are aware that the US and UK have raised rates before, and are raising them further. But they fail to contain inflation. The thesis is that monetary policy takes time to show up in inflation. Then? The questions that hang over Frankfurt are the following: What will come first? The brake on inflation or the brake on the economy?
What the ECB does by raising rates, too, is to try to appreciate against the dollar, which can also have an effect in the second round of lowering inflation due to purchases made in dollars: the more expensive the dollar, the more expensive costs the international market. The ECB is appreciating the euro, making the currency more expensive, which now costs more to request it when signing a mortgage loan. What's more, it directly affects credits and mortgages already signed, and that discourages consumption and the circulation of money... But, will inflation puncture before the economy cools down?
In the ECB, moreover, the idea is beginning to spread that inflation will not be so easy to control. The scenario is new, and the figure of 8.6% for June has been a negative surprise in the tower on the banks of the Main river. The European Commission itself expects to close 2022 with an inflation of 7.6% in the euro area, and 4% in 2023.
In other words, prices are going to remain very high at the beginning of 2023, with current levels or higher in the coming months, and it will cost to be below 7%, which is already having a huge influence. For example? That the ECB has decided to analyze and evaluate the situation month by month, meeting by meeting, to make decisions on interest rate hikes. Until now, there was a guideline according to which monetary decisions were made from time to time at the Governing Council meetings. But now it will be month to month. ECB President Christine Lagarde talks about flexibility. But it is a flexibility that has to do with a changing context, never experienced, uncertain, of threats and challenges beyond the control of the European institutions, to which the tools of the past may not adjust.
War, energy crisis, price escalation, and interest rate hikes that open a new era in a scenario never before experienced: a war in Europe that fully affects the eurozone.
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