The European Central Bank has speculated. Instead of fighting rampant inflation at an early stage, the ECB continued to flood the markets with new money even after the outbreak of war. Inflation is therefore also their work.
Now the central bank is turning around with a massive turnaround in interest rates and pithy words. But the credibility damage is there: you want Jens Weidmann back.
In August, the euro zone inflation rate was an alarming 9.1 percent. Ascending trend. The main responsibility for this lies with the European Central Bank (ECB) in Frankfurt, which is actually supposed to protect the monetary value.
But the opposite has happened in recent years. Since taking office at the end of 2019, ECB President Christine Lagarde has been pursuing an extraordinarily aggressive policy of increasing money, in financial circles this is referred to as “uninhibited”.
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At the end of 2019, the ECB’s total assets were 4.7 trillion euros. Two and a half years later it has reached an incredible 8.8 trillion. That means: Under Lagarde, the ECB created 137 billion euros in new money every month, and an additional 4.6 billion every single day.
A stock exchange trader in Frankfurt comments: “The ECB has thrown four trillion euros of new money into the market and is now wondering about inflation”. Although inflation has been raging in Europe for months, fueled by the war in Ukraine, the European Central Bank has continued to flood the markets with new money.
From the beginning of the year to June, 250 billion euros were added. The energy price shock caused by the war has already dramatically worsened Europe’s inflation problems.
ECB President Christine Lagarde and her Executive Board are responsible for the largest money creation in EU history. For months, the warnings and appeals to finally end the excessive money printing have been brusquely ironed out.
Inflation is only a temporary phenomenon, special factors such as the pandemic or supply chain problems are to blame, everything will soon normalize.
Then it was said that the war had made inflation dangerous in the first place. The inflation rate had already reached its highest level in decades in January before the war broke out. The German ECB Director Isabel Schnabel also ignored the inflation warnings for a long time.
In the summer of 2021, as the warners increasingly begged the ECB to turn around, Schnabel added: “Many of the factors that are causing inflation to rise this year are likely to subside in 2022. With the prevailing major slack in the labor market easing only gradually, medium-term inflation is likely to remain below the Governing Council’s target.”
Lagarde and Schnabel dismissed criticism of the ECB’s inflationary policy as scaremongering. Now both turn back with pithy words. “In this environment, the central banks must act vigorously,” announced Schnabel at the central bank summit conference in Jackson Hole at the end of August.
“The longer inflation remains high, the greater the risk that the public will lose confidence in our determination and ability to maintain purchasing power,” she said.
She warned that the cost of doing so, should the current high rate of inflation get stuck in people’s minds, would be uncomfortably high. Monetary authorities would therefore have to express their “strong determination” to quickly bring inflation to the target level.
From the point of view of most financial market experts, the current interest rate hike comes much too late. The rhetorical U-turn by Lagarde and Schnabel is loud. But that hardly wins back the badly damaged credibility.
The impression is created that the ECB is wobbling. In any case, the media echo is devastating. Lagarde is widely criticized as “miscast” and “Madame Inflation”. The Bild newspaper sees a “declaration of bankruptcy”, the mirror even demands an “apology” from the ECB,
In fact, not only the Ukraine war is to blame for the escalating currency devaluation – the ECB’s policy itself has violated a number of stability rules. It was actually forbidden in the Maastricht Treaty that the ECB co-finances national budgets by specifically buying government bonds from financially tight governments. But Lagarde did just that in excess.
A serious monetary policy was thrown overboard under the slogan of its predecessor Mario Draghi “Whatever it takes”. With the flimsy argument “special times require special measures”, the monetary policy emergency was declared a permanent situation.
Lagarde’s lack of respect for frugal Europeans – especially Germans – is illustrated by a quote from October 2019 when she argued that having a job was more important than protecting one’s savings.
Lagarde’s flood of money should make it easy for France and the southern European countries to refinance the high debt and mitigate the consequences of the pandemic. It thus triggered a massive redistribution of savers to the states, economic researchers call the effect “inflation tax”.
Only when the protests against the ECB’s inflationary policy grew louder and inflation rates exploded did Lagarde finally agree to change course in the second quarter of 2022 – albeit in slow motion. When the US Fed turned monetary policy earlier and more decisively, Lagarde was still playing for time.
A wide circle of companies, banks, trade unions, politicians, associations and scientists have been accusing the central bank of inactivity for months. According to the savings banks, the currency watchdogs had fueled inflation themselves for months.
The EPP, the largest group in the European Parliament, warns Lagarde that citizens will lose confidence in monetary policy if high inflation “robs them of their money’s value month after month”. The inflation tax effect is politically explosive because millions of citizens would be coldly expropriated here without democratic legitimacy.
In retrospect, the demonstrative resignation of the fundamentally serious Bundesbank President and inflation critic Jens Weidmann was a beacon. Quite a few in the financial industry now want Weidmann back – preferably in Lagarde’s post.
The article “The fact that Lagarde has no respect for frugal Europeans was already evident in 2019” comes from WirtschaftsKurier.