Euro: The European Central Bank will meet this week to decide on a likely interest rate hike at a time when the eurozone is plagued by higher inflation, weak economic growth, and rising political polarization. The situation is further complicated by growing support for euroskeptic and populist parties in Germany and France, Bloomberg agency points out in its commentary.
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ECB faces pressure from inflation and rising political tension
According to commentator Lionel Laurent, the current moment is not ideal for raising borrowing costs. The euroskeptic AfD convincingly won in Saxony-Anhalt and French far-left politician Jean-Luc Mélenchon called for the cancellation of French debt held by the ECB. Higher rates could further dampen economic growth and worsen voter sentiment. At the same time, the rate hike is seen as a test of the ECB’s credibility, which according to advocates of stricter policy must respond to price pressures regardless of political consequences.
The head of the German central bank, Joachim Nagel, who supports the rate hike, criticized both AfD’s calls for Germany to leave the eurozone and Mélenchon’s proposal to cancel debt. Year-on-year inflation in the eurozone has meanwhile accelerated to 3.3 percent, the highest level in nearly three years and significantly above the ECB’s two percent target. However, core inflation has fallen to 2.4 percent, which according to Laurent suggests that the feared wage-price spiral is not yet occurring and further tightening of monetary policy could cause unnecessary damage to economic growth.
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France is becoming one of the biggest risks for the eurozone
Special attention is focused on France, the eurozone’s second-largest economy, where weak growth and high financing costs are supporting a shift of some voters toward populist parties. Nominal GDP growth is slowing sharply and French bond yields have reached their highest level since 2008. Part of the increase in financing costs is related to the global bond sell-off, but also to domestic political risk and the possibility that Marine Le Pen could become president. Inflation in France is moreover caused, according to the commentary, more by supply problems, such as energy prices, than by overheated demand.
The political situation could thus significantly complicate the ECB’s next steps. AfD is gaining support among German voters who reject bailing out over-indebted countries, while in France support for proposals for radical solutions to debt problems is growing. The European Central Bank may thus find itself in a situation where it will have to defend its anti-inflation mandate even at the cost of further deepening economic and political problems. Laurent recalls that during the debt crisis, the ECB under Mario Draghi’s leadership played a key role in saving the euro, while today finding a similarly strong political and institutional response may be significantly more difficult.
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Source: ÄŒTK
