Nobody Dares to Take Responsibility for Monetary Policy in Europe

Last week was “big inflation week,” which was “big central bank week.” Thus, there are interest rate meetings in the US, European, British, and Norwegian central banks – and in light of the inflation figures of recent months, it will be extremely interesting to see how the central banks react.

Monetary Policy Should Be Tightened

Based on inflation developments, in my view, there should be a prospect of significant monetary tightening all around. The side effects of current expansive economic policies are becoming clearer and clearer.

But even if the side effects are clear, it is far from certain that the central banks will react to them – especially not the European Central Bank. A towering government debt binds the European Central Bank to keep interest rates low, almost no matter what else happens in the economy.

Thus, much could indicate that the central bank and politicians in Europe have been painted in a corner where monetary policy can almost never be tightened. If this is the case, it places great demands on other economic policies.

Especially fiscal policy – which must lift all the more in relation to economic governance when monetary policy is put out of force – at least when there is a need for a tighter line in economic policy.

The ECB Is Tied on Hands and Feet

The situation is not entirely different from the Danish economy, where monetary policy is also tied to hands and feet. This is due to the fixed exchange rate policy in the Danish case. That is not the reason in Europe. But the almost chronic reluctance to pursue responsible economic policy has thus put Europe in a similar situation.

The Danish economy is doing well without a monetary policy – but that is only because, broadly in the Folketing since the beginning of the 1980s, there has been a recognition that the fixed exchange rate policy places special demands on fiscal policy and the will for structural reforms. Unfortunately, that will not seem to be present in all European countries.

Many countries lack a basic understanding and political will to pursue sustainable fiscal policies through ongoing budgetary discipline complemented by structural reforms.

No One Dares to Take Responsibility

I, therefore, fear that the result will be “let stand.” The central bank will not dare to tighten monetary policy for fear of the debt-ridden countries’ consequences, and more activist fiscal or structural policies will not offset the lack of monetary policy action.

Things may be going well, but if inflation takes hold, which we do not yet know will be the case, then Europe is left to bet on economic success. No one dares to take responsibility.

So, in my opinion, the economic and financial development of the coming years may well become a mess in Europe. A messy deal with significant financial and real economic uncertainty and high inflation.

I do not forecast a new European debt crisis; on the contrary, too high inflation can reduce debt problems if interest rates do not keep pace with inflation. However, high inflation has significant side effects.

Inflation Does Not Affect Everyone Equally

Thus, someone risks being hit very hard on the wallet, and this could lead to significant economic challenges and political dissatisfaction.

And while some are hit by low inflation, others are benefiting from the permanently low-interest rates. Low-interest rates primarily benefit the best off, as the low-interest rates support the stock market and the housing market.

In my eyes, therefore, it becomes crucial that instead of managing the economy with our eyes fixed on the rearview mirror with great concern for government debt, which was the big concern in the recent crisis, we try to look out the windshield. We need to address the side effects that high inflation and extremely low-interest rates can cause.

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