A hawkish and arrogant ECB is frightening the European economy

Every increase in borrowing costs, including Thursday’s half-point move, advances Frankfurt officials’ fight against runaway inflation but also risks having a heavier economic impact. The trade-off means that the potential cost of an error increases with each decision.

With inflation in double digits and officials expecting to stay above their 2% target for years, this week’s meeting caught off six months of drastic action and set the tone for further monetary tightening.

It is surprising as the eurozone economy is probably the hardest hit by the energy crisis and the squeeze on supply chains. The risk is that the central bank underestimates the economy’s weakness. With inflation caused by two-thirds by the rise in energy and raw materials, the impact of the increase in rates will have a limited effect. Yet, the ECB is the most determined to make its policy restrictive.

Such a stance will set the stage for more significant disagreements among ECB officials next year, making it harder for Christine Lagarde to reach a consensus in the Governing Council.

The war in Ukraine and concerns about climate change have made the energy transition more urgent. We will need trillions of investments in the years to come. If rates rise to levels that economic actors cannot afford. this investment could be at risk.

The consequence may mean inflation in the euro area will remain high for longer because we would not effectively build the infrastructure to reduce price pressures. This will erode competitiveness and dampen demand, with long-term consequences for the economy.

The ECB has taken a hawkish stance in a highly uncertain environment. There are better postures than this. You can have strong positions when you have certainties and control your setting. We are far away from such a situation. 

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