Concern at the ECB, by Joan Tapia

On Thursday 9 the European Central Bank did as planned. confirmed that would not buy new debt from the states, the one that has financed the large increase in spending caused by the pandemic, and that in July the interest rate would rise by 0.25%. But he added, because inflation is worse than expected, that the September hike could be 0.50% (instead of 0.25).

The consequence was immediate pressure on the debt of the most indebted countries. First, Italy, which is the economy (except for Germany) most affected by the war in Ukraine, has a debt of no less than 150% of GDP (Spain ‘only’ 118%), and the ‘Peace Draghi’ (the Government of national union) is coming to an end due to the upcoming elections. And the nervousness also reached, although less, Spain and Portugal. The markets stirred. Could we be at the beginning of another euro crisis? And the ECB was also concerned when it learned from the ‘Wall Street Journal’ that The US Federal Reserve would tighten its policy on Wednesday raising rates not 0.50%, which was expected, but 0.75%. The highest rise since 1994 after reaching in May also the highest inflation (above 8%) since then!

What would happen in the European markets if the nervousness about the ECB’s decision was joined by the alarm of the new US rise? Were the ‘spreads’ going to increase more, the difference between the price of the debt of the strongest countries and those of the south? Did you go from worry to fear in Frankfurt? The truth is that the German Elizabeth Schnabel, very influential member of the executive committee of the ECB, already underlined Tuesday night in Paris that the ECB’s commitment to the euro is essential. And on Wednesday the president of the ECB, Christine Lagard, called an unscheduled meeting and unusual, of the entire board of directors of the ECB.

The ECB wanted to reassure the markets and in short it has succeeded in obliquely assuring (fears of overreaching) that it has room to, if necessary, buy debt of the “attacked” countries at the cost of not renewing that of the most solid countries. Then, that it will study a mechanism to prevent “disorder” between the cost of the debt of the different countries. In other words, it is going to continue raising rates, but it is not going to allow it to have a negative impact on the stability of the euro zone.

He wants to slow down economies and, at the same time, help the weakest ones. Mission Impossible? Perhaps, but the ECB knows that it has to do it and has wanted to make it public. It will not close its eyes as it happened at the beginning of the 2008 crisis. Good news for Italy, Spain… and even for France.

But the purchase of debt will not be free as it has been up to now. it will be annoying ask for funds to finance the debt if, at the same time, the public deficit, which is what creates debt, is not corrected. A primitive translation for Spain carries messages for both the Government and the PP.

Sánchez will not be able to continue increasing social spending just because he thinks it fair and convenient. Will pensions be raised by 7% or 8% if inflation is within those parameters in November and collective agreements are at 3.5%?

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And if he rules Feijóo will not be able to insist that the remedy to evils is to lower personal income tax in general. Less taxes mean, in principle, more deficit and more debt.

Everything is less simple and more complex. There will be new unstoppable expenses and taxes can be lowered to offset it. But the big headline is: Less spending and not lower taxes. Sánchez and Feijóo must be aware.

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