Because Lagarde’s draghian trip to the ECB is sacrosanct
What did Francesco Giavazzi, economic advisor to the Prime Minister, Mario Draghi, say about the moves of the ECB chaired by the French Christine Lagarde. Giuseppe Liturri's comment
Faced with a ten-year BTP whose yield today crossed the threshold of 4% – continuing the sudden movement started on Thursday afternoon after the press conference of the President of the ECB Christine Lagarde – Mario Draghi brought into the field Professor Francesco Giavazzi, his faithful advisor to Palazzo Chigi.
The Bocconian economist is not kind to Lagarde and argues that "the ECB promises to raise rates to respond to the rise in inflation with the wrong instrument". This is because “we do not have demand inflation, as in the US, but we do have inflation linked to the price of gas. Therefore, in the face of the reduction in private demand in the coming months, we must accelerate the PNRR ”.
Meanwhile, the professor's attention to stimulating investments as a tool to eliminate supply problems is to be welcomed, there are some aspects that are not convincing.
1) The markets are reacting in a very nervous way not only due to the increase in official rates, but also due to the lack of a plan by the ECB to keep the yields of Italian bonds under control and steal them from investors' bets. Indeed, they were encouraged by Lagarde's words.
2) During the press conference on Thursday – an element that went unnoticed by almost all commentators – Lagarde answered a question about the nature of inflation and stated that it has gone well beyond energy products and is now widespread at 75% of the goods in the basket. He also saw the first signs of a price-wage spiral. Which is why, Lagarde concluded, the increase in rates is useful, and how.
3) It certainly helps that part of the private demand compressed by inflation and rate increases is replaced by other demand constituted by public investments from the PNRR. This on the demand side, it might make sense. But it is on the supply side that the discourse limps. In fact, the investments necessary to overcome the bottlenecks and bottlenecks in the supply and logistics chains are much higher and different from those envisaged by the PNRR. That plan – born already old – today is really out of history. Indeed it could make the bottlenecks worse. It is for this reason that rising interest rates will do damage. The ability to make investments and therefore expand the offer will be compressed. Damage on the demand side is only part of the problem.
Lastly, Giavazzi is well aware that there would be a way to calm the tensions on rates: call Cdp, Intesa, Generali and Unicredit and ask the respected CEOs to buy BTPs.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-e-sacrosanta-la-bordata-draghiana-alla-bce-di-lagarde/ on Mon, 13 Jun 2022 13:46:13 +0000.