ECB, all of Lagarde’s mistakes (also according to Panetta)
Who and how criticizes the ECB chaired by Christine Lagarde. The deepening of Giuseppe Liturri
Numerous cracks are beginning to appear along the path of rate hikes traced by Christine Lagarde starting from July 2022. On Monday 7 Bloomberg released research by two of its economists (Jamie Rush and Maeva Cousin) who envisage a painful showdown for the Eurozone in the next 12 months. The ECB is even accused of having laid the foundations for dealing the economy of the 20 member states a deadly blow, worse than that recorded with the rate hike that preceded the 2009 crisis and similar to that of the sovereign debt crisis in 2012.
The cycle of rate hikes and liquidity absorption (via repayment of loans granted by the ECB to banks) combined with the restrictive fiscal policies associated with the return of the Stability Pact (reformed or not) could progressively erode up to 5.1 percentage points of GDP in the fourth quarter of 2024. To be precise, these are 3.8 points attributable to the effect of the rate hike and another 1.4 points due to the elimination of aid to mitigate the impact of the energy crisis.
What is expected to be a "soft landing" for the USA, risks being a frontal impact on this side of the ocean which will begin to cause significant damage as early as the third quarter of this year (with a 2.5 point increase will be missing) until reaching a peak of 5.1 points in 12 months. In line with the 18-month period which is the prevailing estimate of the delay with which a rate hike makes the restrictive impact on the economy felt.
A perfect storm is foreseen also due to the simultaneous restrictive stance of the budgetary policy of the Member States. In fact, regardless of the definitive structure that the Stability Pact could assume at the end of the negotiations for its reform, a path of consolidation of the public finances certainly appears, with the consequent negative effects on growth.
These are figures that immediately put the ECB under pressure. Also because economists fear that this time the transmission of monetary policy choices could take place to an amplified extent, compared to the norm. In fact, 425 points of rate increase in 12 months is in itself an unprecedented figure which, moreover, is grafted onto an economic fabric already tried by a serious energy crisis and the traditional role of stabilizer exercised by public budgets will be inhibited by European rules.
The future governor of Bank of Italy and current member of the executive committee of the ECB, Fabio Panetta, is by no means insensitive to these risks. On Thursday 3, in a documented and punctual speech at Bocconi, he indicated a new path, departing from Lagarde's one-way vision. Neglected by the major newspapers and considered worthy of a few lines in the pages of the economy, we believe that instead it constitutes a significant turning point for the direction of the ECB's monetary policy in the coming months.
Starting from the premise that the hikes implemented so far were necessary to anchor inflation expectations and get out of an overly accommodating monetary policy, according to Panetta we are now in restrictive territory and further hikes “risk causing unjustified damage to the economy ”.
Today it is preferable, instead of aiming for even higher rates, to insist on remaining at the current levels for a long time.
In fact, all the data available indicate a decline in inflation expectations, the shock in the prices of raw materials and energy products has substantially been absorbed, as evidenced by the trend in producer prices. The transmission of these effects to consumer prices is only a matter of time and is already underway. Furthermore, corporate profits could help absorb the foreseeable and legitimate attempt to link wages to inflation, without triggering any spiral. Finally, the signs of economic weakness are already evident, at least in the manufacturing sector.
Panetta fears that the effects of Frankfurt's restrictive choices have yet to fully manifest themselves and – with a candor worthy of a better cause – believes it possible that " the transmission of monetary policy will produce even stronger effects than expected ". In short, they started to give a slap and landed a punch.
Then it's time to change your approach and take " a breather" , because the risk of going too far with the increases is now evident and it is prudent to wait for the effects of the previous increases to fully manifest. Better to stay at these levels for a long time than to raise and then hastily cut.
Immediately the next day we read in the Wall Street Journal Professor Tomas Philipson of the University of Chicago, according to which rate hikes are fueling inflation in some industrial sectors. In fact, the widespread belief that increases are able to contain demand and therefore the upward pressure on prices does not take into account the effects on supply. And if supply falls more than demand, price tensions increase rather than decrease. This is precisely what is happening in the real estate and automotive markets in the USA, because high rates discourage potential sellers from offering used cars on the market in order not to renounce loans received in the past at very low fixed rates. More generally, firms could pass on higher financial charges to downstream prices and further fuel inflation.
Lastly, awell-documented article arrived in Reuters on Thursday 10, in which it explicitly speaks of the probability that the ECB will actually backtrack and begin to cut the rates that it raised only a few weeks ago. On the other hand, similar sudden changes of course have already occurred in 2009 (after having raised in 2008) and in 2012 (after having raised in 2011). Collecting the opinions of various economists, the thesis is that Germany, the current great sick man of Europe, is suffering too much damage from rate hikes and the ECB has gone far beyond what is necessary in the long sequence of hikes. To the point that some economists predict that a sequence of rate reductions could start from March 2024.
It's time for Lagarde to realize that the club can't have the precision of a scalpel and take a nice vacation.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bce-tutti-gli-erroracci-di-lagarde-anche-secondo-panetta/ on Fri, 18 Aug 2023 03:15:29 +0000.