The European Central Bank Must Follow Its Mandate


The European Central Bank ought to be extremely concerned by two pieces of recent news. The euro is on the verge of parity with the U.S. dollar and has accumulated a drop of 17 percent since 2021, more than 35 percent since 2008. However, the eurozone’s inflation reached 8.6% last June. This is 5 percent without taking into account the food and energy components. With the Consumer Price Index (CPI), at its multi-decade highest, inflation in six of the eurozone’s countries is well above double digits, which includes Spain.

In Switzerland, the June inflation rate was 3.4 percent, with the core being 1.9 percent. Although Switzerland is dependent on imports of gas and commodities as well as supply chains, it has not engaged in mass printing its currency.

The euro is the greatest monetary success of the last 150 years, and it can’t be jeopardized by risking the independence of the European Central Bank. This is a high-risk situation, which concerns those who wish it to continue as a reserve currency.

The balance of the European Central Bank is 69.5 percent of the GDP of the eurozone, while that of the Federal Reserve is 37 percent of the GDP of the United States and the Bank of England’s is 39 percent of the UK GDP. The euro is not the reserve currency of the world. Although the U.S. Federal Reserve pays close attention to global dollar demand, the bank has made the huge mistake of increasing money supply far above the demand, which in turn, has triggered inflation.

Be aware that not all currencies are equal in price. While some prices might rise due to exogenous factors, not all of them will rise unless there is a reduction in the buying power of currency printed without control. Frank Shostak, an Austrian School economist, reminds us that inflation refers to money supply growth and not price denominated.

A weak euro and rising inflation are extremely worrying factors, because in June 2021 the growth rate of broad money supply (M3) in the eurozone was 8.3 percent annualized, with M1 (currency in circulation and overnight deposits) growing by 11.7 percent. In other words, the increase in money supply (M3) was still 16 percent higher than during the so-called “Draghi bazooka.” In May 2022 it’s still growing above 5.6 percent, with GDP rebounding a mere 2.6 percent (consensus estimates).

Why was there no “inflation” between 2009 and 2019? There was. We can’t forget that when policymakers told us that “there was no inflation” the accumulated loss of purchasing power of the euro was 75 percent (from 1991 to 2021).

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Although the annual CPI was contained, there were large asset inflations as the increasing supply of currency went into financial assets and sovereign debt. Of course, housing and non-replaceable goods and services prices skyrocketed, but nothing like in 2020. The increase in money supply not only soared to exceed 12 percent (M3) but was also mostly directed to non-productive public current spending. Inflation rose sharply as a result of the flirtation between Argentina and the United States’ monetary policy.

In any event, the U.S. Dollar is the reserve currency of the world, although the euro is not far behind. The Bank for International Settlements reports that most international transactions are done in U.S. Dollars. They are closely followed by the euro. The euro is also the currency that developed countries have the highest risk of being redeminated (someone could decide to disintegrate it). It is therefore crucial to protect the unambiguous mandate of European Central Bank, price stability. This refers to the strength of the euro as common currency.

The Federal Reserve increases rates, which means that there is more global demand for U.S. Dollars. However, in the eurozone, weakening the euro makes imports much more expensive, and the eurozone finds itself with a record trade deficit–which is the equivalent of buying dollars and selling euros–of 16.4 billion euros.

The energy factor may be relevant but it cannot be used by policymakers to reduce the buying power of the most successful monetary instrument in modern history, the euro. Trade deficits are worsened by imports and commodities purchased in weaker currencies. Let’s not forget that the eurozone posted an exceptionally low inflation rate (measured as CPI) when oil and gas prices soared in different periods during 2012-2014.

The weakness of the euro should not be underestimated. People who believe that weak currencies are good for exports need to look closely at rising import costs, record trade deficits and slumping wages.

An increase in inflation and negative real rates can lead to a dangerous combination.

A weak euro can mean a lower purchasing power for real wages and less money in the hands of citizens of the eurozone, which means more poverty.

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Nobody would like to work in a weak currency. The euro should not be.

Defending inflationism is not an advantage. This impoverishes people, penalizes efficient sectors and damages confidence in the currency. Criticism of the European Central Bank’s slow actions isn’t anti-European. Anti-European are inflationism and the impoverishment of all.

It is vital that the European Central Bank fulfils its mission, which is to ensure price stability.

The mandate of the European Central Bank isn’t to make Spain and Italy pay artificially low prices while creating huge imbalances and deficits that will lead to a decline in savings and salaries. It’s about price stability. Inflationism has been the main cause of Europe’s destruction for many centuries.

The mandate of the European Central Bank is not to hide the incompetence and high inflation of government budgets. Its mission is to protect the real wages of families within the eurozone, as well as to maintain price stability.

It is crucial that the European Central Bank increases rates because the problem here isn’t just a slight increase but an accumulation of risk and debt over years of low rates–an unacceptable monetary aberration. Artificially depressing interest rates encourages excessive risk and debt.

The European Central Bank must stop the debt monetisation madness. Its mandate isn’t to hide sovereign risk but price stability. The anomaly isn’t bond spreads of 100 or 300 basis points in some peripheral economies, but the lunacy of previously artificially forcing negative yields on sovereign bonds.

The anomaly isn’t to have spreads commensurate with the solvency and credibility of the issuer; the anomaly was accumulating up to 11 trillion euros of debt with negative yields from issuers with decreasing solvency and credit credibility.

Normalizing monetary policies doesn’t create “a speculative assault” when credit credibility and strength are strong. What was a speculative attack was disguising risk and excess debt by monetizing 100 percent of the net issuances of sovereign borrowers.

It’s essential that the European Central Bank understands that the survival of the euro depends on containing the constant increase in the consumption of monetary reserves of governments that already represent more than 50 percent of the GDP of the economies. It should understand:

The role of the monetary policy is changing from one that buys time to implement structural reforms and a means to avoid them.

With the perverse and dangerous incentive to spend more and monetize it without control, impoverishing all, the credibility and legitimacy of the institution and currency is threatened. The excess debt is subsidised while prudent savings are punished. This is the clear recipe for structural decline and stagnation in an economy that encourages inadvertently the crowding out effect of public policy on private sector. It leads to less productivity and growth as well as more debt.

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Investors should not be concerned if stock and bond markets suffer from the excessive optimism and complacency in recent years.

Market participants would prefer the European Central Bank strengthens its independence and protects the currency. It should also remove a few percentage points from portfolios. The alternative of stagflation or a complete crisis does more damage to people in the Eurozone.

One of these days, the central bank members will see that the people who support the euro and its currency are not those who encourage inflationism and fattening debts and the devaluation of the currency’s purchasing strength. They’re those who believe the euro should be valued as an alternative to the dollar. It is likely that when this time arrives, it will be too late. The alternatives will probably come from other currencies.

Destroying currency’s purchasing power is not a policy that benefits the entire community. This is the worst form of antisocial behavior. This is what impoverishes everyone.

The independence of the European Central Bank should not be in question; nor should it respect its unambiguous mandate.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.


Daniel Lacalle is the chief economist of hedge fund Tressis. He also wrote “Freedom or Equality,” the “Escape from the Central Bank Trap” and “Life in the Financial Markets .”


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