The crisis caused by inflationary spiralwhich began last summer and has been aggravated since February by Russia’s invasion of Ukraine, has not only forced the European Central Bank (ECB) to redirect and toughen its monetary policy for the first time in almost a decade. It has also resurfaced struggle between the two souls who coexist within the institution: that of those who defend a flexible interpretation and comprehensive part of its mandate that takes better account of the economic situation (‘pigeons‘) versus that of those who advocate stick to your goal to achieve price stability (‘hawks‘). The last few days have given good proof of this.
The monetary authority of the euro zone, thus, has to take two fundamental decisions that will largely determine the evolution of the economy of the monetary union in the short and medium term. On the one hand, you must decide at what pace and How high are the rates? official interest rates to combat inflation that is already at 8.6%, the highest since the creation of the euro. And on the other hand, you have to define the conditions that the countries that benefit from the mechanism what last to avoid uncontrolled rises in risk premiumsdesigned especially for Italybut also for Spain, Greece and Portugal.
The crucial aspect of both decisions has made old ghosts resurface. During the tenure of mario draghi at the head of the ECB (2011-2019), the president led a majority of ‘pigeons’ in the government council that imposed its theses on some increasingly dissatisfied ‘hawks’, headed by Jens Weidmanpresident of the mighty Central Bank of Germany. Tensions flared in unprecedented fashion just before the Italian’s departure, when his latest stimulus plan prompted his opponents to launch angry criticism in public (by the standards of the usually restrained central bankers).
Cracks in the consensus
Such was the situation Christine Lagarde I try to calm down since her first appearance as the new president of the institution: “I am not a dove, nor a hawk. My ambition is to be an owl, which is often associated with a certain wisdom”. The French, in this line, has given more time to the governors of the national central banks to express their opinions in the governing councils of the ECB and has endeavored to achieve broader consensus for the decisions from which his predecessor obtained.
Without reaching the virulence of 2019, however, in recent weeks they have begun to show cracks. The ‘falcons’ have spread their wings again. The Governor of the Bank of Austria, Robert Holzmanhas stated that he would have preferred that the institution had already raised the price of money, while the Latvian Mārtiņš Kazāks he has defended raising rates by 50 basis points in July, instead of the announced 25, if inflation continues to deliver bad news. In the same line, the Dutch Klaas Knot has left open the possibility of a rise in September of more than the 50 basis points expected by the market and has defended that rates should reach 2% at the beginning of 2023, a level shared by the Belgian Pierre Wunsch.
neutral and gradual
By contrast, Pablo Hernandez de Kos, governor of the Bank of Spain and one of the most relevant ‘dove’ advisers, has defended raising rates to between 1% and 1.5% if inflation evolves until the end of 2024 as the monetary authority expects today let it happen The Portuguese Mario Centeno has also advocated bringing rates to the so-called natural level (which implies a neither expansive nor restrictive monetary policy), while the Greek Yannis Stournaras and Italian Fabino Panetta They have opted for a “gradual” rise in rates.
Faced with these positions, Lagarde has stated that the pace of rate hikes “cannot be defined ex ante” and has warned that “there are clearly situations in which gradualism would not be appropriate”, while its vice president, Luis de Guindos, has avoided putting a possible cap on the increase in money prices. For his part, the German Joachim Nagel He has defended this week that “a restrictive monetary policy may be necessary, at least temporarily.” Likewise, he has tried to cool down the growing expectation that the ECB will be forced to lower rates next year by the worsening of the economy, as happened in 2008 and 2011: “The situation is completely different”.
soft conditionality
Related news
The jump to the fore of the president of the Bundesbank is especially relevant, since since he took office in January he had maintained a relatively low public profile. Nagel has especially wanted to show his reluctance to the instrument for control risk premiums. Thus, he has claimed to use it in a “strictly temporary” and “only in exceptional circumstances and in strictly defined conditions“. In particular, he has claimed that “it is essential that the Member States continue to have sufficient incentives to carry out their fiscal and economic policies in a sustainable manner and reduce your debt levels“.
His position, however, seems minority, since ‘hawks’ such as Knot and Wunsch have supported the mechanism. From the different pronouncements and leaks in recent weeks, it can be concluded that the ECB is leaning towards an instrument with a softer tax conditionality than the 2012 OMT, which required compliance with commitments so tough that no government requested it. The beneficiary countries, thus, could have to commit to having a credible medium-term fiscal plan, endorsed by the ECB and/or the European Commission. In addition, the central bank could encourage private banks to increase the reserves they keep in the institution to reduce the liquidity available in the system and neutralize the inflationary effect of the new purchase of bonds.