The ECB Cannot Fix the Euro Area Stagnation

The European Central Bank (ECB) decided to cut rates by 25 basis points the same day it elevated its own inflation estimates for 2024 and 2025.
The ECB Cannot Fix the Euro Area Stagnation
A woman walks past the European Central Bank (ECB) headquarters in Frankfurt, Germany, on Jan. 28, 2021. (Kai Pfaffenbach/Reuters)
Daniel Lacalle

The European Central Bank (ECB) decided to cut rates by 25 basis points the same day it elevated its own inflation estimates for 2024 and 2025. You simply cannot make this up.

If you wanted unmistakable proof of the lack of independence of central banks, this is it. The ECB only has one mandate, price stability, and has violated it for nearly four years. Why? The purpose is to fund the biggest expansion of the government’s size since the euro’s inception and uphold the delusion of a sovereign debt bubble.

We must remember that the ECB has not implemented a restrictive policy at all. It has kept the “anti-fragmentation tool,” which disguises the real risk of sovereign issuers and should be called the “anti-market tool.” This has allowed governments that have increased their fiscal imbalances to keep an artificially low-risk premium versus the German bond. Furthermore, the ECB is continuing to repurchase part of the bond maturities, and the EU has launched the Next Generation EU Fund, which is another massive money-printing exercise.

The only real restrictive tool used by the ECB has been to increase rates. Therefore, the entire negative impact of the ECB policy has been borne by families and small businesses because of higher financing costs. Meanwhile, governments have not limited their money printing through deficit spending, nor have they simply consolidated the extraordinary expenditures of 2020. In some cases, they have even increased spending beyond that “unique” figure.

Inflation is neither a coincidence nor inevitable. It’s a policy, because the government is the biggest beneficiary of the steady rise in aggregate prices.

It is worth remembering that the consumer price index (CPI) is not “inflation”: It is a measure of inflation. Inflation is the loss of the purchasing power of a currency.

CPI inflation in the eurozone rose to 2.6 percent in May, according to Eurostat. In fact, all measures rose from the April 2023 level, particularly services, which are rising at a 4 percent annual rate. Furthermore, eight countries in the euro area reported annual CPI inflation rates of more than 3 percent. This means that the accumulated level of inflation from 2020 will be more than 23 percent. Despite the previously mentioned evidence and the upward revision of its own estimates of inflation, the ECB decided to cut rates.

The government and its group of propagandists are attempting to persuade you that everything, with the exception of massively issuing more currency than the private sector’s demand, is the cause of price increases. However, the only thing that can cause aggregate prices to rise, consolidate that increase, and continue to go up, even if at a slower rate, is the destruction of the purchasing power of the currency that states issue by issuing much more than the private sector demands.

The most extreme interventionism asserts that inflation indicates a production deficit rather than a rise in currency quantity. It is a falsehood of such magnitude that it should not even be debated. The state generates a huge amount of money, and even if production increases, it cannot prevent everything we import—from components to raw materials—from costing us much more in local currency. No. A widespread increase in output does not eliminate inflation if the state continues to consume new currency units to artificially increase its influence on the economy.

Why are there supporters of inflationism? This is the most effective method for the state to exert its influence on the economy and seize the resources generated by the productive sector, all while using a currency that is increasingly depreciated.

Inflation is the equivalent of an implicit default on debt. The state issues a pledge of payment and returns it with a decreasing value.

There was no data on the May inflation release to justify a rate cut.

First, the latest monetary aggregate note from the ECB indicates a significant increase in the amount of money in the system. Moreover, the calculation of the total amount according to the Murray Rothbard method (True Money Supply), which includes monetary funds in financial aggregates, shows that the quantity of money has not decreased at all since September 2023 and will likely increase significantly in 2024.

The annual growth rate of the eurozone’s broad monetary aggregate, M3, rose to 1.3 percent in April 2024 from 0.9 percent in March. If we calculate the true money supply, the figure would be +4.5 percent in April 2024, consistent with an inflation rate of 2.6 percent and a cumulative rate of 23 percent since 2020.

Second, lowering interest rates is an incentive to continue increasing state imbalances in countries that have refused to control their deficits and, above all, have taken advantage of inflation to collect more taxes.

Third, a cut in interest rates is an incentive to increase the total amount of money in the system and the rate of increase on the monetary base.

Fourth, the eurozone’s problems are not caused by interest rate hikes. The eurozone was already stagnant with negative nominal interest rates, was in the middle of the Juncker Plan, and is still stagnating amid the Next Generation EU Fund.

Fifth, it makes no sense to cut rates when the credit supply has not decreased (in fact, it is rising) and the credit demand remains stable. In April, the year-on-year growth rate of loans to households rose by +0.2 percent. Credit to non-financial corporations rose by 0.3 percent, according to the ECB.

The first impact of the ECB rate cut was a swift slump in the euro–U.S. dollar exchange rate, which will make citizens poorer and imports more expensive.

The eurozone economy is not in stagnation because of rate hikes. It is in stagnation because of the wrong fiscal, industrial, and energy policies. What reason is there for cutting rates? Just one. Cheaper funding for fiscally irresponsible states. The state promises you free things and charges you more with less purchasing power, higher taxes, and impoverishment. There is no such thing as what they call inclusive monetary and fiscal policy. It is the recipe for stagnation.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of the bestselling books “Freedom or Equality” (2020), “Escape from the Central Bank Trap” (2017), “The Energy World Is Flat”​ (2015), and “Life in the Financial Markets.”