The European Central Bank’s decision to raise the key interest rate by 0.25 percentage points in July resembles an act of desperation. Due to the high inflation in Europe and the immense national debt of the southern countries, the ECB is in a big quandary. An end to the euro is becoming more and more likely.
The turnaround in interest rates is finally here! Is that really her? For the first time in 11 years, the ECB is about to raise interest rates by 25 basis points to – now get this – 0.25 percent. No joke. This act of desperation alone makes it clear how helpless and haphazard the monetary authorities in Frankfurt are.
They have nothing to counter either the historically high inflation or the current crises. The reason is simple: the powder has been completely used up in recent years. The financial, euro and most recently the corona crisis have pushed the ECB further and further into a corner. At the same time, other topics such as the green transformation with the Green Deal have also started to be worked on. The answers to each of these crises have always been the same: print money and cut interest rates. This keyboard was played inflationary.
The result is impressive, but not good: Due to the constant money printing, the ECB’s balance sheet has inflated to a gigantic 8.81 trillion euros, which corresponds to around 84 percent of the economic output (GDP) of the euro zone.
The result is a historically high inflation rate of 8.1 percent in the euro zone. In addition, 40 percent of government debt is on the ECB’s balance sheet. At the same time, governments are in debt up to their necks and need inflation more than the ECB is comfortable with in order to devalue their debts at the expense of the citizens. Because the citizens foot the bill through rising prices, because at the same time their purchasing power is being taken away from them in the EU.
Hand in hand, the asset price bubble has risen with the ECB’s balance sheet in recent years. Stocks, classic cars, works of art, real estate, etc. – all have continued to swell in euros. This merely reflects the loss of purchasing power. For example, if you bought a property ten years ago, you now get twice as many paper certificates for the same property – whether renovated or not. The property has not doubled in size nor has the property doubled in size, it just goes to show that the purchasing power of paper ECB notes has halved in value and we have all lost de facto purchasing power.
Marc Friedrich is a six-time bestselling author, financial expert, sought-after speaker, pioneer, free spirit and founder of the fee-based consultancy Friedrich Vermögenssicherung GmbH for private individuals and companies.
His new bestseller was the most successful business book of 2021: The Greatest Opportunity of All Time – What we now have to learn from the crisis and how you can benefit from the greatest wealth transfer in mankind
According to the Federal Statistical Office, the euro has officially lost more than 35 percent of its purchasing power since the euro was introduced in 2001. But if you take a more objective equivalent value, such as the price of gold, we have a loss of purchasing power of more than 90 percent, which comes a lot closer to reality. Especially when you see how real estate prices, stock markets, etc. have developed. The ECB has thus made the rich richer in a planned economy and organized in a socialist manner – at the expense of the middle class, which is becoming poorer.
We have seen nothing but what I have predicted to be the largest transfer of wealth in human history from the bottom, middle and top to the very top into the hands of fewer and fewer. This is the Cantillon effect, which unfortunately works like clockwork. The downright ridiculous interest rate hike planned by the ECB, which seems tentative and uncertain, does justice neither to the 8.1 percent inflation rate nor to the debt burden.
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As always, the ECB reacted too late and too little. It cannot increase interest rates significantly, otherwise the southern states of Europe would collapse one after the other.
The ECB is in a quandary: it can choose between fighting inflation or saving and keeping alive the euro and southern Europe. You can’t do both together. The next big crisis is therefore already looming.
A look at government bonds in the euro area makes the dilemma clear: government bonds are already wide apart again. Italy currently has to shell out 2.5 percent more interest on the capital market for new debt than Germany.
The problem: For a country with a debt-to-GDP ratio of almost 150 percent, every percentage point is painful.
In Germany, we saw a 50-year inflation rate high of 7.9 percent in May. Blaming all this on the war in Ukraine is too easy. Even before that, we had well over 5 percent inflation.
In this chart you can clearly see how high inflation rates were fought with rising interest rates in the past.
This time, the European Central Bank has the problem that the interest rate is 0 percent, which means that the ECB’s room for maneuver in Frankfurt is more than limited. But this is not the only problem: we also have war in Europe, the collateral damage of the Corona crisis such as broken supply chains, a looming recession and lockdowns in China, and an energy crisis that was partly caused by a wrong energy transition itself.
All of this points to an impending major crisis.
So the ECB now has to decide between plague and cholera: if it fights inflation and thus ends the euro currency experiment, then it sends the zombie states into bankruptcy. If it saves them, it risks hyperinflation. No matter how you twist and turn it, both lead to the same result: the end of the euro!
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