Thank the stars the UK never joined the euro.
‘Catastrophe Christine’ Lagarde, the ECB’s President, may be about to repeat the same mistake she made in 2011 and raise interest rates at the worst possible moment for the eurozone, exacerbating an already critical situation and tipping it over the edge according to Matthew Lynn in today’s Telegraph.
“It takes a long memory to recall the last time the ECB raised interest rates. It was way back in 2011, when the economy was still recovering from the financial crisis, and there were signs of prices starting to rise.
That decision is now rightly viewed as a grave mistake, choking off any hope of a sustained recovery, and leading directly to the crisis of confidence that engulfed the zone through 2012, and almost led to Greece leaving the monetary union.”
With inflation now running at 8.6% across the zone as a whole, there are alarming spikes within it:
“In Estonia it is up to 22pc, in Lithuania it is at 20pc, while in Greece, often the most unstable economy within the zone, it is above 12pc. It is hard for any central bank to look at prices rising at that rate and sit on its hands. Especially in Germany, the hawks are calling for decisive action to bring inflation back under control.
The trouble is that it will tip the eurozone into recession.”
Trouble has broken out on all fronts: a collapsing euro – it’s at near-parity with the dollar – is pushing up import prices and if Russia does not turn the gas taps back on
“then Germany, Italy and even France will all have to impose some form of energy rationing. Factories will close, offices will go back to home working, and output will collapse as a mini-lockdown is imposed on economies that have barely recovered from the last one.”
The last thing that’s needed therefore is a rise in interest rates. The trouble however lies with the person in charge:
“In reality, Christine Lagarde is a politically astute lawyer, but unlike her predecessor she is not an economist, nor has she ever worked in the markets.
As France’s finance minister under president Sarkozy she squandered the chance to push through his reforms of the economy, costing him the following election.
As managing director of the IMF she presided over a “solution” to the Greek crisis that caused the deepest recession in recorded economic history, while her poorly-timed ‘rescue’ of Argentina led to the biggest losses in the history of the fund.
It is hardly a record that inspires much confidence.
Right now, she faces perhaps the biggest challenge of her career. In truth, the ECB made a huge mistake when it raised interest rates prematurely after the financial crisis. It is about to make the same mistake all over again.”
“A more astute central banker would face down the inflation hawks, and keep rates on hold, confident that collapsing demand will be enough by itself to bring inflation under control.
The consensual, inexperienced Lagarde is unlikely to be brave enough for that – and the whole of the continent will pay a high price for Thursday’s monetary tightening.”
The full article can be read below with a link to the original here: