Madame inflation

Instead of fighting a galloping inflation, the ECB continues to flood the markets with new money. ECB President Christine Lagarde thus becomes the face of new inflation, the pressure on her is growing and she faces a dilemma.

Christine Lagarde has become the greatest money creator in history. The balance sheet total of the European Central Bank has now broken the amazing mark of eight trillion euros. Last week, it reached the record amount of 8.38 trillion euros. Since the beginning of the corona pandemic, it has risen by 3.6 trillion euros in just 21 months. This means that under Lagarde, which has been in office for two years, the ECB pumps 171 billion euros into the market every month, or an additional 5.7 billion each individual day.

This triggered not only a wild speculative boom in the stock and real estate markets. Inflation is now also reaching consumer prices. The German inflation rate rose to its highest level in 28 years at 4.5 percent in October. German savers are worried, and the displeasure among the population about large-scale rising prices is growing. "Retirees and savers watch out, inflation eats your money," warns the "Focus", the "Bild" newspaper rails against the "price hammer", and the "Welt" even sees the "prosperity of the Germans in danger".

Critical voices on ECB policy are increasing from German politicians. Even in the discreet German financial sector, a number of board of directors warn against the aggressive monetary policy of the ECB.

Decline of the inflation takes longer than expected

Lagarde has felt the increasingly critical mood at the start of the week in the European Parliament. After talking down inflation for months as a "short-term", "temporary" phenomenon based on "special effects", she now admitted to parliamentarians that "the phase of increased inflation in the euro area" is probably more than just a phase: "The decline will last longer than originally thought," she admitted her misjudgment.

Lagarde was confronted at the hearing by CSU member Markus Ferber, the monetary spokesman for the largest parliamentary group EPP, with the accusation that citizens are gradually losing confidence if high inflation "deprived of monetary value" by month. It is not only in the European Parliament that voices are raising that accuse Lagarde of a unilateral policy of interests. Lagarde wants to specifically finance France and the EU southern states with their high national debt with zero interest rate policy including bond purchases. The demonstrative resignation of Bundesbank President and inflation critic Jens Weidmann speaks volumes.

In the vicinity of the Bundesbank, it is assumed that Lagarde acts out of political reasons. France is heading for the presidential election in 2022, so an interest rate turnaround would only disturb. She most likely will only change course after the French elections - but this is irresponsible for monetary stability in Europe. In Frankfurt, the nickname "Madame Inflation" is now circulating for Lagarde. While the Fed has already initiated the monetary policy turnaround in the USA, Lagarde refuses to streamline monetary policy reins. According to Lagarde in the European Parliament, a key interest rate increase is "not in prospect". She explains thinly: It remains very unlikely that the conditions for an interest rate increase in the coming year will be met.

Not quite as temporary

Meanwhile, Deutsche Bank boss Christian Sewing counters Lagarde's arguments in Frankfurt and calls for a change of monetary policy: "And sooner rather than later," he warned at Euro Finance Week in Frankfurt. The supposed panacea of recent years - low interest rates at seemingly stable prices - has lost its effect, now we are struggling with the side effects.

Nicolo Salsano, the new head of HSBC Germany, takes a similar view: "We also see that the issue of inflation is not quite as temporary as it may be postulated by political circles.”

Cornelius Riese, co-head of the cooperative head institute DZ Bank, recalled that the ECB had warned against deflation in recent years in view of low inflation rates at the time. For me, the question arises: Where is the ECB's awareness of the problem, what is in sync with inflation? DZ Bank has even calculated what Lagarde's monetary policy costs German savers: deposits, pension securities and insurance will be devalued by an average of 2.3 percent this year. The resulting loss of purchasing power of private financial assets should amount to 116 billion euros. Michael Stappel, chief economist of DZ Bank, warns that this is around 1400 euros per capita.

The chief economist of the British Federal Reserve Andy Haldane has been warning for a long time that inflation is a "uneasy tiger". While the economy is slowly recovering from the corona crisis, the tiger is difficult to tame. Haldane says what many financial experts currently fear: "For me, the great risk at the moment is that the complacency of the central bank allows the big cat to get out of the bag." There is a risk that inflation will prove difficult to tame.

The dilemma

But Lagarde has a dilemma. If she continues to pursue her expansionary monetary policy undauntedly, she risks not only her personal reputation, but also a deepened inflation, speculative bubbles and ultimately a crisis of confidence.

However, if she stops the flood of money and bond purchases, interest rates are likely to rise. But neither the highly indebted states can afford higher interest rates, nor are they good for the just rising economy in the euro area.

Italy's public debt, for example, has risen to EUR 2.7 trillion. An increase in interest rates would drastically make debt service more expensive in one fell swoop. Throughout Europe, the states plunged into new debt during the corona crisis. In Spain, for example, public debt increased from around 95 to about 125 percent in terms of gross domestic product. In Greece, it is even 210 percent. And France, which is particularly protected by Lagarde, reports a record level of 115 percent.

If the ECB quickly turned the tide, these countries might have problems raising fresh money on favourable terms in the financial markets. Even a new euro crisis would not be ruled out. The scope for action of "Madame Inflation" is getting smaller, the president's chair, which was so pleasantly reputable two years ago, has become a hot seat.