Having a rudder in your hands is not the same as having a steering wheel.
The differences between a boat and a car are obvious, but the most surprising thing for a driver is the reaction time. If you have the steering wheel in your hands, from the moment you decide to turn until the car turns, there will be a few meters of progress depending on the speed you are going. If all you have is a rudder, from the moment you decide to turn until the boat turns, its progress in its original direction is so long that sometimes you’ll be surprised that you’ve even turned. And the great ship, A large body of water that must be moved to return.
Yes, it’s an economic column, which is why our ship has the letters “European Economy” painted in blue, and among its captains is the European Central Bank.
Its purpose is to To maintain price stability Protecting the value of the Euro to achieve a port of economic growth and job creation. Their problem is that the sea we sail on does not appear on the navigation charts, and we must navigate in uncertainty. In many cases, on the other hand.
A year ago, the ECB’s governing body began to turn its head to move us away from inflation, a storm that could, no doubt, capsize the ship and put it at risk. When the maneuver began, in July 2022, Eurozone inflation reached 8.9% year-on-year.
But, despite the rudder turning, the ship continued on its initial course (a lot of economic mass had to be moved to change direction), and it took us more than a quarter (inflation in the Eurozone reached its maximum in October 2022).
however, The European Central Bank did not change leadership again, despite the already preferred courseBut since then it has maintained its position, and the main monetary measures of the Eurosystem (the rate at which the ECB lends to banks for one week, with collateral) are carried out at 5%.
Inflation in the eurozone, for its part, came in at 2.9% in October, close to the ECB’s medium-term objective of 2%.
What would the leader do in this situation? Will it stay the same or adjust the direction a bit? Because even as we move away from the deflationary storm, we are starting to get dangerously close to the pit of economic contraction.
A rise in interest rates affects not only inflation but also the growth of the economy, and while European households’ disposable incomes benefit from lower prices, they are also penalized by rising financing costs. They see their mortgage payments increase or, outright, they don’t buy a home.
A rise in interest rates not only affects inflation but also the growth of the economy.
For their part, the activity of the firms decreases and they prefer to use their own capital rather than external capital to meet their financing needs.
Although Spain does not seem to come out too badly in the picture, interest rates are also affecting a state with a higher than desirable public debt. And not only because of compliance with the fiscal rules that made us a member of the Eurosystem, but because the structural deficit is close to 4% and the public debt equals 111% of all the wealth the country produces in a year, its GDP, which does nothing but Reduce the government’s room for maneuver in the face of any new crisis.
If we continue with the naval metaphor, there are some crises on the table or under the sea: the war in Ukraine and its threat to the prices of food, raw materials and energy, including the one in Gaza; the aging of the population and its effect on pensions; Or the climate crisis and its impact on food production.
But for these reasons, Interest rate hikes alone did not shrink the economy. But all this uncertainty affects economic agents, undermining their confidence and extreme caution.
If households decide not to eat, or companies decide not to invest, not just because of monetary policy actions, but in response to uncertainty, they become the wind that affects the direction of the ship, in this case bringing it closer. To the dangerous coast of economic recession.
Neither central banks nor governments can ignore it Reaction time required for economic decisions (money or finance), and to initiate a turning maneuver in time before hitting the iceberg and sinking the ship.
