The crucial meeting of the European Central Bank. On Thursday, July 21, the European Central Bank is expected to launch a new “anti-fragmentation tool”, which aims to limit the expansion of the interest rate differential on government debt in the eurozone. The enterprise must also stop inflation as it reaches new heights,
Inflation, mainly caused by higher energy prices, rose to 8.6% in June. Record indicates that the European Central Bank may raise rates more than expected. Since its last meeting, the monetary institution has repeatedly said that it will raise its key rates by a quarter of a point. But it can reach half a point. Is this enough to stop rising prices without jeopardizing economic growth? A middle solution must be found.
It must be said that the expected tightening can affect consumers and businesses. However, according to the report by the same Frankfurt Institute, banks in the eurozone tightened their criteria for granting loans in the second quarter. Families are already struggling to buy, especially real estate. Gregory Fanel, a professor at Grenoble School of Management, also thinks the effect may be more subtle on the business side.
The idea, by restricting access to credit, is to try to limit the increase in demand. The cost of a mortgage will be higher, but we’ve known for a long time that first-time buyers are rarely the ones able to purchase real estate. So, will the idea of tightening bank credit for those who want to buy real estate on credit have an effect? It is possible, but not automatic. It is very likely that, in any case, there will be fewer projects to be financed, and therefore if the actors themselves do not necessarily want to borrow more, then monetary tightening in this case may be unproductive.
Grégory Vanel, on the impact of higher interest rates on households and businesses
A new tool to fight inflation
Christine Lagarde, president of the European Central Bank, will also have to reassure markets in the face of risks weighing on financing conditions within the eurozone. A new common mechanism, called the “Anti-Fragmentation Tool”, should be introduced in particular in order to iron out differences between countries.
It should help some countries in poor health, such as Italy, to borrow under better market conditions without increasing their public debt. The Frankfurt Institute seeks to prevent the difference between member states’ ten-year rates and German rates, the famous “spread”, from being subject to speculation. But Pascal de Lima, chief economist at Economic Cell, an economic monitoring and analysis firm, is not sure this will be enough.
Indeed, I fear that the ECB’s defragmentation measures will be ineffective and that at the same time, we will simply have to abandon them and implement austerity policies.
Pascal de Lima talks about the “anti-fragmentation tool”, the new weapon of the European Central Bank
All this to avoid a new European debt crisis, as it was in 2011.