The Big Dilemma: Interest Rates Increases or Price Controls

The main driving force of inflation in Europe is not excessive demand, but mainly energy market problems and secondarily shortages and consequent price increases in raw materials or intermediate and final goods, due to the war in Ukraine and the Covid pandemic in China. If nominal interest rates rise do you think the problems will be addressed and inflation will fall?

Obviously not. For the time being, at least that is what the ECB is going to do, instead of, for example, the EU Commission intervening in the oil, gas and other commodity markets respectively, forming a “buyer cartel”, as Italian Prime Minister Mario Draghi insists. In essence, the Commission is idle and at the same time pushing and pushing the ECB to raise interest rates to keep inflation down, deciding to follow the other major central banks and, with a slight delay, start raising interest rates.

Premiere, in two months, ie at the end of July with an increase of 0.25% of the current -0.5% interest rate, where it will be the first interest rate increase that ECB will make from 2011 until today, while others will follow.

The excuse that inflation in the eurozone runs four times over 2%, the inflation target that the ECB has in its statutes. In fact, we have an ostrich from the EU-Commission that can cause more suffering. That is, to accept that raising nominal interest rates will be the tip of the iceberg for the European economy, leading it into recession and, instead of preventing it, facilitating Russian President Vladimir Putin’s plan to turn the war in Ukraine into a generalized economic war of attrition, which will test everyone and first of all the resilience of the economies and societies of the European Union.

The UK is already in recession in the third quarter and Germany will have its GDP decline in the current secondary quarter. The recovery of the European economy was nervous before the war. The war in Ukraine puts it under siege and causes it to slow down. Where an increase in nominal interest rates may lead to a recession due to anemic growth with inflation. That is, stagnant inflation.

Inflation is the number one problem of public opinion worldwide. If the reasons were some excess demand, the increase in nominal interest rates might have been an effective monetarist-type policy, although it would have to be dramatically high for it to work. While now real interest rates remain negative. Rising interest rates would have to crush the economy before crushing an inflation rate of 8%.

But the causes of inflation are different. Although it was originally fueled by the issuance of ample money and abundant state aid, today it is fueled mainly by problems in energy production, in the production of food and raw materials but also in the transport of intermediate and final goods due to generalized lockdowns in China etc.

So if these are the causes of the tsunami of expensiveness, raising interest rates will push them and have no effect. There are definitely solutions.

  • There are suggestions by Mario Draghi.
  • There are also the toolboxes of the Member States and the EU-Commission with several market intervention measures for price control, where and for as long as necessary.
  • Boosting the incomes of vulnerable sections of European societies and the world of wage labor.
  • The inflation index-linked of salaries.
  • The imposition of extraordinary taxes for redistribution of costs.
  • Imposing a maximum price on critical goods for as long as and where required.

Of course, one would say that these policies are not risk-free. Certainly not, but are there any risk-free solutions today?

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