In just under two weeks, the invasion of Ukraine and the sanctions once morest Russia tons of frozen water have been dumped on Europe. To the already high inflation -5.8% in the EU and 7.4% in Spain-, now it will be necessary to add another extra inflation for the new and sharp increase in the price of oil, natural gas, wheat and many raw materials. And a drop in growth is also palpable, still difficult to quantify.
The concern is general. Large companies intensive in electricity consumption paralyze their production because they can’t stand the rise in electricity prices. A survey of Pimec says that 16% of its companies are in danger and 320,000 jobs may be lost. And the main stock markets have collapsed more than 10% so far this year. The situation is devilish. When we came out of the pandemic, the war in Ukraine has plunged us back into a great political and human catastrophe. And there is hysteria regarding the economic consequences. A reputable analyst exaggerated on Tuesday: “Europe is almost certainly already in recession. Consumers are not going to go out and spend the savings accumulated during the pandemic when a war has broken out on the other side of the door.
On the economy, the governments -all of them, although some more than others- transmit great feeling of bewilderment. Logical. In coming out of the crisis, the determined overly expansive monetary policy (negative interest rates and purchase of bonds to inject money) of the ECB and the American Federal Reserve. But now the central banks are hesitating. If they don’t give some (how much?) backtracking on support for the economy, inflation will skyrocket. A disaster. But if they hit the brakes they will damage the economic fabric and employment.
In America, with an unemployment rate of 3% and inflation of 7.9%, the Federal Reserve is going to start raising rates this month. The situation is more complicated in Europe, with an average unemployment rate twice as high and large differences between countries. The ECB is not going to raise rates immediately, but its president, Christine Lagarde, already made it clear this Thursday that the party is over. Since the start of the pandemic, many European countries such as Spain and Italy have been able to face a large increase in social spending and the public deficit because the ECB – to prevent a recession – bought their public debt at very low interest rates.
Lagarde, who has raised the inflation forecast for this year from 3.2% to 5.1% and who is perhaps still optimistic, has said that she will immediately reduce the purchase of bonds and that, unless inflation is reduced, the It will end in July. And then, in a week or longer, interest rates will rise.
These are measures that in the short term cannot fail to have negative effects for families, businesses and state financing that they must take care of social spending. The ertes without purchase of public debt by the ECB will be more complicated.
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Italy and Spain will be the most affected countries. To begin with, Spain less because this Thursday the 10-year debt was at 1.26% (worse than a few weeks ago), while Italy already had to pay 1.90%. But Italy has a government of national union while ours is weak because it lacks a parliamentary majority.
Now, with a much more uncertain horizon, the parties, at least the most representative ones, will have to agree on some measures that will be necessary and that will not always be popular. And if they don’t, for fear of breaking their triumphalist speeches, the consequences will be worse.
