Recession to stop inflation? This is the dangerous recipe of central banks, including the ECB. The Nobel Prize for economics David Card explains it: the scenario is gloomy.
Will the central banks of the world, with ECB and Fed in the foreground, stop inflation with recession?
This is what analysts, politicians, experts in economics and finance are asking themselves, with the markets that are increasingly “tilting” because shaken by forecasts of decrease and high prices for a long time to come.
The context in which we find ourselves is very complex, especially in Europe, so involved in the repercussions of the war in Ukraine. The supply of gas is unknown, energy prices continue to rise, several companies are stopping because raw materials are too expensive.
Meanwhile, with double-digit inflation in the Eurozone, the ECB is pursuing a very strict policy on interest rates, which increased to 2% after the October meeting.
The high cost of money must discourage investments and loan requests, or demand, to cool inflation expectations: this is Lagarde’s message. In the meantime, however, with high prices driven by external factors such as the conflict, there are many signs of an economic deterioration in Europe: more expensive mortgages, risky credit for banks, purchasing power in free fall, economic growth of states blocked. .
The 2021 Nobel laureate in economics, David Card, a student of minimum wages and employment, has no doubts: recession is the goal of the ECB and central banks.
The goal of central banks is recession
A lucid but alarming reasoning that of the economist and scholar David Card: the path traced by the central banks is leading us straight towards recession. And Europe will see a worsening of working conditions.
The Nobel Prize for Economics, interviewed by Italian news outlet La Stampa, clarified the intentions of the ECB and, in general, of central banks, warning of devastating economic consequences:
"Central banks want recession and loss of purchasing power. Fed and ECB are convinced that it is the only way to keep inflation under control. On the other hand, they only move on the basis of future expectations, and despite repeating that they want to avoid a recession, they do everything to bring us into a deep recession. It may not be as hard as it was in 1980, but it won’t be easy.”
Interest rates will rise again according to the expert, "as long as wages and prices rise less than 2.5%."
All this will have an impact first of all on working conditions and, therefore, on household incomes. Although people’s purchasing power is already under siege in Europe, with supply chains not yet re-established, increasingly expensive energy bills and a weak euro against the dollar, the ECB’s goal is to slow down the demand for consumption to curb prices.
However, this strategy of high cost of money and steady wages, Card pointed out, will have adverse effects, with loans and mortgages more expensive for households. Credit-dependent sectors, such as automotive, will suffer the blow. “And with more unemployed, more debts will become less sustainable”, the expert recalled.
Wages can collapse in Europe
As a student of the minimum wage and employment, Card focused on possible estimates of working conditions in Europe.
With such an aggressive ECB on interest rates, our continent can also record a reduction in wages from 2% to 5%. Unemployment, with a steady rate of 7.9% in September, can soar to 10%.
How to avoid a deep recession?
The Nobel Card Prize winner highlighted that, in a scenario of such serious uncertainty, it will be essential that Governments maintain adequate safety nets for the lowest incomes and for workers:
“Universal incomes must be modulated so as to be an incentive and not a disincentive to work. We need a negative income tax to reward those who work and punitive for parasitic behavior "
Furthermore, there are two crucial factors that can push the world economy towards a lasting recovery: a Russia-Ukraine negotiation and the easing of zero-Covid policies in China.
Pending these turning points, the ECB will continue to raise rates, with all the expected consequences. Including the recession.
Original article published on Money.it Italy 2022-11-07 14:00:00.
Original title: La recessione ci sarà perché la vogliono le banche centrali
