The ECB’s aggressive interest rate hike is causing problems for the EU

The ECB’s aggressive interest rate hike is causing problems for everyone in Europe. To citizens who are asked to pay a higher installment on their mortgage or consumer loan, to businesses that are raising the cost of servicing their loans, to states that see their existing bonds collapse, and even to public debt that, instead of being downgraded with inflation, it increases due to higher interest rates.

As growth is held back by rising lending rates, businesses close, households struggle and the European economy faces a recession deliberately induced by the ECB to curb inflation, the only winners are the banks. By keeping deposit rates at zero and raising lending rates they make much bigger profits – at everyone’s expense.

These profits are a double-edged sword. Because the increase in interest rates on loans that generates these profits puts such a strain on the economy, citizens and businesses, that new bad loans will be created. In member countries such as Greece, Cyprus, Portugal, they struggled to get rid of the mountains of red loans and whose people paid very dearly to rescue (sort of) the bankrupt banking system of these member countries and nobody wants the same thing to happen again.

Banks must return to organic profitability, i.e. profitability that now comes from banking work.

A job they don’t do today. And they don’t, that is, they neither seek money from savers competing with deposit rates, nor offer loans to businesses to grow, because they earn elsewhere. From the ECB itself, which, by raising its interest rates, gives the banks the opportunity to deposit their liquidity in the central bank’s accounts and to speculate at its expense. So they don’t need to do any banking, the ECB gives them money at zero interest and they lend it back to it at a risk-free profit. Hence the 2022 earnings being announced. The system is crooked.

On the other hand, the issue of the energy policy pursued by the European Commission, there is a long delay in dealing with the energy crisis that proved fatal for the increase in inflation.

Since inflation comes from the supply side, raising interest rates is not the most appropriate policy. EU member states need help from the Ministers of Development and Energy. They need to change the electricity pricing system. Before the war in Ukraine the existing system worked, ensuring low electricity prices. But now that Putin is using natural gas as a weapon, the system is not working, on the contrary, it is raising the cost of electricity to excessive levels.

The system for determining the cost of electricity production will change, Europe is making a new one, which is not based only on the price of natural gas but on a weighted average of all energy sources, and the price of electricity will be descaled. The European Commission was too late, however. This is what Europe should have done since Putin started using gas prices as an economic weapon. Now it’s late, inflation is up and rising interest rates are making things worse.

The growth rate from the ECB will surely slow down and electricity prices will deescalate, but only when the war is over can the EU hope for a return to normal situations.

The European leaderships, whether they are in the European Commission and manage European policies and budgets, or they are in the ECB and determine the European monetary policy, do not lead the developments, nor do they even react to them in time and correctly. They continue to react fire-fighting and casually, and this is causing problems in Europe.

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