by Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank is in trouble again and this time the bad news does not come from Greece, Italy or another southern eurozone country but from Europe. Germany.
The first economy of the community block is weakened by the toxic combination of a reduction in its exports to China, which remains its main trading partner, the slowdown in its manufacturing and construction sectors and the questioning of its model. trade based on cheap Russian oil.
Germany’s difficulties are curbing growth in the euro zone as a whole and causing the ECB to revise its rhetoric. After ruling out the idea of a pause in raising its key rates in June, the institution is no longer ruling out this option for next month.
And the market thinks the central bank may even have to reverse its rate hikes in the medium term, as it did in its last tightening cycle in 2011, when the debt crises in Greece, Portugal, Ireland, Spain and Cyprus were accompanied by a wider recession.
“There are similarities between the conditions in 2011 and the current ones,” said Richard Portes, professor of economics at London Business School. “There was a major supply shock and inflation was clearly going to be very short-lived.”
THE SICK MAN OF EUROPE
Contrary to what happened at the time, it is Germany, and not the countries of the South, which is at the epicenter of the problem, which has led many observers to bring out the expression ” Europe’s sick man”, last used to refer to the country in the early 2000s.
Some of Germany’s current ills have their roots in Russia, on which Berlin depended for a third of its energy supply until the start of the war in Ukraine in February 2022.
Others are more complex and intrinsic to Germany, due to its over-reliance on exports, lack of investment and shortage of labour.
“If the government does not take decisive action, Germany risks remaining at the bottom of the growth rankings in the euro zone,” said Ralph Solveen, economist at Commerzbank.
But at least part of Germany’s economic sluggishness is attributable to the ECB.
The central bank knowingly dampened economic activity by raising rates in an attempt to bring inflation back to its 2% target.
Rising borrowing costs are particularly affecting industry, which is dependent on investment, and no eurozone country has a larger industrial sector than Germany.
“Easing monetary policy because Germany is in a difficult position would not be wise, but tightening it further would add macroeconomic pressures to microeconomic pressures,” said Richard Portes of the London Business School.
The ECB is thus forced to consider putting an end to its tightening cycle even before having observed a lasting and long-awaited decline in core inflation.
Making a clear link between underlying inflation and further rate hikes could prove a miscommunication for the ECB, which is now trying to shift its focus from rising financing costs. borrowing, but on maintaining them at a high level.
“They (ECB officials, editor’s note) made a mistake by pushing core inflation too high,” said Carsten Brzeski, global head of macroeconomics for ING Research. “The risk is that they have already gone too far.”
HIGH RATES FOR A LONG TIME
After announcing in June that the ECB was “not even considering suspending” its rate hikes, ECB President Christine Lagarde said a month later that “at this stage” she does not believe that the bank “still has a long way to go”.
A few days later, after data showed inflation excluding energy, food, alcohol and tobacco holding steady at 5.5%, the ECB chose to point out that most other price measures are showing signs of moderation. .
Fabio Panetta, member of the executive board, pleaded last Thursday to maintain interest rates at their current level for longer, rather than raising them further.
All of this sets the stage for a possible pause in September, likely with an option to revert if necessary and a commitment to keep borrowing costs high for some time.
But some experts are speculating on rate cuts for the second half of 2024.
“We continue to believe that the ECB will change course significantly over the next few months, making no further hikes this year and launching a series of cuts in March,” the economists at Reuters wrote in a note. ABN-AMRO.
(Report Francesco Canepa, Laetitia Volga, edited by Jean-Stéphane Brosse)
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