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The blunt austerity of the European Central Bank




Massimo Pivetti


The ECB raised interest rates - and is probably the first in a series of increases expected in coming months - in order to fight inflation in March rose to 2.6% from 2.4% in February. Since inflation is of foreign origin, caused by increases in international prices of energy raw materials and foodstuffs, the reasons for initiating anti-inflationary policy in these terms of money more expensive is not immediately apparent.

First, according to current versions of the dominant Orthodox view on monetary policy, increased interest rates by the central bank would be justified only if behind the higher inflation also had increases in money wages and price attributable to imbalances in the internal conditions of supply and aggregate demand. But surely even Trichet * may think that today, within the Eurosystem, aggregate demand is pushing the limits on potential output.
If we disregard the then dominant theoretical view, the fact remains that any increase in the cost of money is itself directly inflationary therefore fight inflation by raising interest rates is a little "how to douse the flames of a fire by throwing buckets of gasoline. The interest rates are indeed a component of total production costs and companies usually react to cost increases with price increases.
In response to increases in interest rates increases the ratio of price / money wages and therefore tend to reduce real wages. This in turn will boost wage demands-the that will generate upward pressure on money wages - unless the increase in the cost of money will not be able to have a negative impact on economic growth and employment through the contraction of domestic demand and net exports, and therefore do not lead to weakening the bargaining power of workers.
remains, of course, the inflationary effect of the euro against the dollar and other currencies on rising interest rates by the ECB may result, but at the cost, of course, a loss of competitiveness of goods produced within the euro area, and after a contraction in net exports.


So ultimately, higher interest rates may now be able to fight inflation in Europe only if the highest ratio price / money wages tend to determine that they were more than offset by: a) a lower price in euros of imported inputs, through the exchange rate, b) a smaller increase or reduction in money wages through likely negative effects on employment caused by either reducing real wages and the appreciation of the exchange rate - that is, negative effects on consumption and net exports caused by higher interest rates. In the present context, we must not neglect the impact of higher public expenditure of money on interest payments and cuts in primary spending of compensation (cuts social spending), to which European governments invariably resort to avoid increasing the total deficit.
more independent central bank in the world has really resisted the temptation to contribute to the first obtuse "austerity" prevailing.

* Director of the ECB


Original: Economy and Politics