The President of the European Central Bank, Christine Lagarde, declared that “the economic horizon is assombrit” in the euro zone due to the poursuite of the war in Ukraine and the inflation that “remains a high level indesirable pendant a certain time.”
The consequences of the armed conflict, with record inflation and great uncertainty in the economy, “significantly cloud the outlook for the second half of 2022 and beyond,” said the Frenchwoman after the ECB decided to raise its rates for the first time since then. 2011 in an attempt to curb the rise in prices.
This tightening of monetary policy in the euro zone had already begun in July with the end of purchases of new debt in the markets. The rest of the central banks have been much more active for months in the face of price increases, such as the US Fed that eliminated its rates in March. But the ECB’s task is made more complex by the growing threat of cuts in Russian gas supply, the risk posed by the political crisis in Italy and the fall of the euro.
The ECB “is capable of doing things in a big way”
In Italy -one of the most vulnerable economies in the monetary area-, the prime minister and predecessor of Christine Lagarde at the head of the ECB, Mario Draghi, has also submitted his resignation to the president. His departure, which could lead to snap elections this fall, immediately boosted the interest rate on Italian loans in the market.
To ward off the specter of a new sovereign debt crisis, the European Central Bank has announced a new instrument to protect the most fragile States against speculative attacks, accentuating this gap, or spread, unjustifiably.
The ECB argues that these “spreads” hinder the correct transmission of its monetary policy. But strict conditions of use must be defined, the guardians of the euro have no right to help the government budget. “The Governing Council will determine the eligibility” of a country for this new tool and “the ECB does not take a position on internal policy issues,” said Christine Lagarde without naming Italy despite several questions on the subject. But “if we have to use it, we will not hesitate”, assured the French, stressing that the ECB “is capable of doing things in a big way”.
Gas uncertainty
In the euro zone, the gas crisis also complicates the ECB’s task. The Nord Stream gas pipeline linking Russia to Germany was indeed restarted on Thursday after ten days of maintenance, but it is still not operating at full capacity, deliveries have dropped sharply since mid-June. A total stoppage of gas deliveries by Moscow would plunge the euro zone into recession and too rapid a rise in tariffs would aggravate the situation. “We are very attentive” to energy and “particularly gas” because of its impact on electricity prices and inflation, Lagarde said.
However – a ray of hope – the European economy continues, according to the ECB, “benefiting” from the lifting of health restrictions and the resumption of activity, particularly in the tourism sector.
Source: BFM TV
