Lukáš Kovanda: The ECB is breaking monetary-political taboos. This will make the rich even richer and the poor even poorer

There is a turning point in the ECB’s monetary policy. The central bank of the eurozone no longer makes raising interest rates conditional on the end of bond purchases. This approach can seriously increase the gap between the rich and the poor.

The rich will get richer and the poor will get poorer. Such can be the result of monetary policy, which the European Central Bank has denied until today precisely because of this threat, which it already admits. Today, however, this taboo is breaking. Must. The widening of the wealth gap across the eurozone due to monetary policy is now a threat acknowledged by the main monetary policy institution itself, the “guardian of the euro”.

In the area of ​​monetary policy of the Eurozone – and indeed of monetary policy in general – this is a watershed event with potentially unfathomable consequences, economic, but especially social.

The head of the ECB, Christine Lagarde, admitted for the first time ever that the central bank of the eurozone countries will implement what it has so far predicted, namely the simultaneous increase of key interest rates on the one hand and a large-scale bond purchase program on the other. Until now, the ECB has always said that a necessary condition for starting to raise interest rates is the prior termination of the bond purchase program.

So it’s different now. What does it mean? The ECB will now raise its key interest rates while pushing down interest rates where they are at risk of getting out of control. Interest from the debt of over-indebted countries such as Italy, but potentially France as well, is at risk of getting out of control. In order to save these economies, which are among the largest in the eurozone, the ECB is willing to trample on its previous principles.

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The ECB saves the markets, trouble threatens in the south of Europe

The past week has been a bloodbath not only for cryptocurrencies and stocks, but also for the government bond market. The ECB has now announced that it will speed up work on a mechanism to reduce the difference in bond yields of poorer and richer countries.

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For example, at the end of last year, a member of the ECB management, Isabel Schnabel, claimed that the combination of interest rate increases and the bond purchase program could potentially cause the opening of wealth scissors in society. Indeed, the bond-buying program depresses interest rates more generally, making it cheaper for wealthy people to finance the purchase of real estate or stocks. However, poorer people usually do not own any real estate or stocks, so they do not get as much from the program.

Adding fuel to the fire

The bond-buying program—also known as quantitative easing or “printing billions of new money”—is more generally seen as socially beneficial at a time when inflation is more persistently below the central bank’s inflation target. If inflation is low, there is a risk of its opposite – deflation. If a so-called deflationary spiral were to occur, a general decline in prices in the economy would lead to firms not covering their costs and having to lay off large-scale layoffs – primarily low-skilled workers from the poorer strata.

That is why until now the ECB could claim that it may be inflating the prices of stocks and real estate by buying bonds, but at the same time it is preventing the poor from losing their jobs with the same program. So the rich and the poor will get better.

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David Marek, chief economist of Deloitte

Economist David Marek: We will all get poorer. Real estate doesn’t have to protect us either

January’s record inflation may not be the highest number this year, according to Deloitte chief economist David Marek. The development of energy prices will be decisive. In order for people to protect their money and not be “eaten” by inflation, they must invest it, says the economist. However, this comes with risk. According to him, investments in real estate may no longer be profitable.

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But if inflation in the eurozone is currently at roughly four times the ECB’s target, deflation does not understandably pose any threat. The ECB thus finds itself in a situation it has never experienced, when it has to justify the purchase of bonds in a way other than the threat of deflation. The purchase of bonds is a pro-inflationary factor. So today the ECB actually admits that it will operate a pro-inflationary monetary policy at a time of record inflation.

It will thus further encourage the rise in share or property prices, so that the rich people who have invested in them will be better protected than the poor against the inflation that the ECB will partly help to drive. Especially for the poor, record inflation – partly still fueled by the European Central Bank – will bite off a crucial part of the purchasing power of their savings, if they have any. The poor do not have assets in stocks or real estate. Inflation can thus harm the poor more than the rich, even purely due to the ECB’s monetary policy.

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But the ECB must continue the bond buying program, because without it the bankruptcy of countries like the aforementioned Italy would come seriously close. By buying the bonds of the Italian government, the ECB reduces the interest on the Italian debt, which makes it possible to delay the possible insolvency, i.e. bankruptcy, of Italy.

Inflation, illustration photo

Dalibor Martínek: Should we investigate inflation or pass it by? Or is there another option?

It is fascinating with what nonchalance some leading Czech economists wave their left hand over inflation. But please, thirteen percent, what is it? Thirty years ago, we even had twenty percent here, and we survived that too. And don’t ask me about it, I talk about inflation all the time, I’m tired of it. A real ease of being.

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Read Lukáš Kovanda’s other comments here

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