Reducing price volatility cannot be achieved without the risk of increasing unemployment and slowing down economic activity. Photo: Bruno Neurath-Wilson/Unsplash

Reducing price volatility cannot be achieved without the risk of increasing unemployment and slowing down economic activity. Photo: Bruno Neurath-Wilson/Unsplash

The European Central Bank’s window of opportunity to dampen inflationary fever is gradually closing. With its back to the wall, the ECB’s governing council should be bold enough to accelerate its normalisation policy. However, the pill may not go down well with economic actors.

Reducing inflation is likely to be at the expense of growth. With inflation in the eurozone starting to hover dangerously close to 10%, five times above the 2% target horizon, drastic monetary tightening is only to be expected from the European Central Bank. If the objective is to limit the damage, such a monetary policy will have the direct consequence of further slowing down economic flows and will weigh on unemployment. This is a very risky gamble at a time when the European Union is expecting Russian gas supplies to stop by next winter.

Between mitigating rising prices and protecting the labour market, the ECB finds itself faced with a very difficult trade-off. This requires prioritising economic issues. In addition to being binary, the charge sheet will be all the more brutal for having to be done quickly. While a gradual approach was still an option six months ago, the current situation has changed. A faster than expected normalisation increases the risk of calibration errors.

The so-called ‘hawks’ on the ECB governing council advocate a more aggressive monetary tightening, inspired by the US Federal Reserve. On the other side of the Atlantic, with inflation at 9.1%, the Fed has already planned a third rate hike in July. With this, US central bankers will have raised interest rates by 1.75 percentage points in a single year. In the last three months alone, the Fed has raised rates by 1.5 percentage points. With such a policy, the Fed is now much more aggressive than it was at the end of the 2007-2009 crisis.

Long-term benefits

All eyes are now on the ECB’s next monetary policy meeting on 21 July. The Frankfurt-based institution already announced in June that it would raise its key rates by 25 basis points, its first increase since 2011. A second increase is expected at the next meeting in September. But some analysts expect it to raise rates by 50 basis points this month, under pressure from the ‘hawks’ who, facing off against the ‘doves’, were already pushing for a 25-point increase at the June meeting.

In the US, however, analysts are worried that an aggressive Fed policy will reduce available liquidity, thereby accelerating the economic slowdown that has already begun. In contrast to the eurozone, the US economy is proving more resilient to shocks. On the one hand, US inflation is driven by 30% energy rises, compared to over 50% in Europe. This is in addition to the fact that the US economy is much less dependent on foreign energy supplies. On the other hand, eurozone inflation is partly the result of a supply shock, due to delivery delays and shortages, whereas US inflation is the result of high demand that the economy cannot absorb.

It is therefore chilling to note that a decline in growth could be the remedy for rising and persistent inflation. The financial markets have seen this option coming for several weeks, but economic operators and consumers, in the front line, will have to prepare themselves quickly. A brutal normalisation policy can only be beneficial in the long term.

While the optimism and boldness of the ECB’s hawks could pay off, keep in mind that curbing inflation through monetary policy does not solve its causes. Eliminating bottlenecks in supply chains and reducing instability in both the production and distribution of energy are not within the ECB’s remit, but rather a matter of geopolitics.

Read the original French version of this editorial column on