Germany Must Be Looking at the ECB in Despair
The outlook for inflation and the euro, already dire, is even worse with the central bank unable to raise interest rates enough without destroying the economy.
European Central Bank President Christine Lagarde has a dilemma on her hands.
Photographer: Eric Piermont/AFP via Getty Images
In early January, I argued that rapidly rising inflation would mean that this would be a make-or- break year for the euro as the European Central Bank stopped expanding its balance sheet and probably raised interest rates, sparking a crisis among Europe’s weaker borrowers. I was, it turns out, too optimistic.
Sharply rising inflation means the ECB is impaled on the horns of a dilemma. If it boosts rates even a tiny bit, and surely not by enough to curb inflation, it risks more financial instability at a time when peripheral borrowers and banks are already under pressure. But if it doesn’t raise rates meaningfully, inflation will accelerate further and potentially lead to social instability, vocal questioning of a central bank that has fiddled while inflation has burned and existential doubts about a flawed system that caused the problem.