The interest goes up. ECB promises to protect the weak, but Germans are already creating problems

Eurozone interest rates, set by the European Central Bank (ECB), rose yesterday for the first time in more than 11 years, ending the era of zero rates that had lasted since 2016.

At the same time, fearing a more aggressive response from public debt speculators, the ECB advanced with its famous Protective Shield for the Most Vulnerable Countries (IPT or Instrument for the Protection of Monetary Transmission).

He said it will only be used in a second-line logic and only after a fine-tuning of the quality of the countries’ policies. Many Germans are already turning their noses up.

At the press conference in Frankfurt, Christine Lagarde surprised when she revealed that the ECB’s main refinancing rate will finally rise from its current 0% to 0.5%, when she said a month ago that it would rise to 0.25%.

The tightening will therefore be double what was expected and it is justified, said the senior manager, to try to contain inflation and bring it back to the desired 2%, the ECB’s medium-term target.

The ECB acted vigorously yesterday as inflation indicators have deteriorated significantly in recent weeks. Euro area headline inflation is already at 8.6% (June) and underlying inflation (excluding energy and unprocessed food components) is already at 4.6%, indicating that price increases are already happening in almost all corners of the euro area. penetrate the European economy.

At the same time, as mentioned, the ECB decided to set up a safety net for countries perceived as more “vulnerable” to potential shocks (“disorderly and unwarranted” hikes) in their interest rates, in this new climate of monetary tightening. Frankfurt called it the “transmission protection instrument” of monetary policy.

Several economists realize the need for the measure, but warn that this idea will buy enemies in Germany. Lagarde, as if trying to anticipate the wrath of most critics, said all countries “qualify”, but in fact the protective shield will serve some more than others. It will serve to isolate more Italy, Greece, Portugal or Spain from possible speculative attacks. Italy has just entered a new political crisis.

For Marcel Fratzscher, president of the Berlin-based Institute for Economic Research (DIW), “the ECB took a historic decision and one of the most important in the past 20 years: the rise in interest rates is higher than expected and changed its fundamental communication strategy”.

The German economist admits that “this protection tool is intelligent, but also risky, because it is not clear how it will be used”.

“The conditionality is so low that it is unlikely that it will be able to provide the ECB with limits. In the future I fear a period of increased volatility with increasing political pressure on the ECB” and “critics are expected from the ECB in Germany immediately to the Constitutional Court. Ultimately, this looming political conflict could seriously damage the credibility of the ECB,” Fratzscher said.

Clemens Fuest is also a German, economist and one of the most famous voices on the wings of the so-called hawks, the monetary politicians who have long fought for the end of cheap money and who accuse the ECB of indirectly having the worst performing states these years. aided, in public accounts, less reformist, more complacent.

Fuest, the president of the Munich-based Ifo (Institute for Economic Studies), shoots: “The ECB introduced the new IPT tool [escudo protetor para dívidas soberanas mais vulneráveis] with a broad set of criteria implying that financial support to each Member State will be largely a discretionary decision of the ECB. The European Stability Mechanism (ESM) does not play a role in this. The supported countries will be responsible neither to the markets nor politically.”

Guntram Wolff, director of the Council for German External Relations and former director of the influential Brussels think tank Bruegel, is no hawk, but what the ECB did yesterday could create new problems, but perhaps we are already at a point where we need to be be like that, he says.

“The ECB’s difficulty will be to decide what is justified or not in the distribution of aid through the new instrument of protection (IPT). This will make the ECB even more politicized, but perhaps this is unavoidable, as governments have not yet have made a final decision establishing a fiscal union,” says the economist.

Franck Dixmier, Global Director of Bond Investments at Allianz Global Investors, takes a different view.

Despite the ECB being late (compared to the Federal Reserve, for example) and “lagging”, the ECB acted “clearly and unequivocally”. As for the protective shield, the manager says that “it is based on indicative criteria that all converge towards the notion of fiscal discipline and macroeconomic equilibrium”. “It’s certainly a promise to the hawks, but it weakens the bazooka’s ultimate reach. Volatility is likely to continue in spreads.”

Live from Frankfurt

Yesterday, the ECB also reported that further rate hikes are to be expected from now on, as are other central banks, such as the US Federal Reserve, which is moving much faster and further.

“A new normalization of interest rates will be appropriate at the next ECB meetings,” Lagarde said. The next one is in September. There was talk of a further 0.5 percentage point increase, but taking into account the tightened inflation environment, it is likely to be much more.

Several market players, such as brokers and analysts at global banks, say the ECB’s central rate could reach 1.75% by the end of 2022.

protective shield

In addition to the sharper interest rate hike, the ECB approved such a special protective shield for countries and banking systems most exposed to debt, such as Italy, Portugal, Greece or Spain. It will be “activated” or used if necessary, but it will ultimately be up to the ECB to decide whether or not to activate it based on analysis of a vast array of indicators, Christine Lagarde said.

But before this IPT is activated, the first line of defense is the repayment (or deferral) of assets and government debt purchased during the pandemic program (PEEP).

The ECB explains that the new shield will take the form of a new debt and asset purchase program, but weighted by the degree of “unwarranted” threat to interest rates in these areas.

For example, the IPT will seek to halt disproportionate increases in interest rates, which appear to detach these economies from the normal eurozone, putting them at risk and attacked by speculators and rating agencies.

But of course there are conditions attached to this. Countries that need this support must respect the Stability Pact, show that they are implementing the most urgent reforms that Europe dictated in the European Semester and that they have, for example, a public debt on a sustainable path. All conditions must be met “cumulatively”.

This could put Portugal in trouble, raising concerns, for example, about debt sustainability in the medium term.

Luís Reis Ribeiro is a journalist for Dinheiro Vivo