The European Central Bank is ready to raise rates again and announce the details of the Quantitative tightening, the budget restriction, in December. Ignoring a mild recession is possible, then we’ll see. Luis de Guindos, vice president of the ECB, is not worried by the Northern front which is asking for more aggressiveness against inflation. “We have learned from our mistakes,” he admitted during the closed-door forum organized by Carlo Maria Pinardi’s Analysis in Milan. The context, says De Guindos, remains “difficult” and “worsening”, especially in terms of financial stability. New turbulence due to the energy market “cannot be ruled out”. But, in the case of Italy, the situation is “solid” and there is “absolute optimism” about the country’s resilience in the event of stress.
In mid-December the ECB will experience a complicated situation. On the one hand the Baltics, as well as Germany, the Netherlands, Belgium, Austria, Slovenia and Slovakia. On the other, the countries of the South. The former are asking for a new hike of 75 basis points, the third in a row. The latter ask for gradualness because they know that the recession could touch the services segment, and therefore move from industry to the real economy. «We made a lot of mistakes at the beginning of the pandemic – conceded De Guindos -. We thought there would be a series of business failures, but there wasn’t. Now, however, “the situation has changed”. Businesses, he points out to the audience of entrepreneurs and bankers, “are beginning to suffer, as are the poorest families”. And it is for this reason that “fiscal policy (therefore of governments, ed.) should be more careful, more targeted and selective in providing support to the most vulnerable”.
Frankfurt’s concern concerns a multiple front. “There is a clear deterioration in financial stability in the eurozone,” remarked De Guindos. But price flare-ups are a greater danger than a mild recession. Board decisions are not taken for granted and will be taken “meeting by meeting”. Indeed, «match by match», match by match, De Guindos underlined smiling when speaking of his favorite team, Atletico Madrid. That he is not living, he explains with regret, a favorable moment in the Iberian championship. But he too has what it takes to recover. And then inflation. It will remain in double digits for part of next year. Only in the second half will it begin to decline. The peak, however, may be near.
Also for this reason it will be necessary to have a pragmatic approach towards the normalization of monetary policy. A first announcement of passive Qt on the Asset purchase program (App) is expected in December. Start date of the restriction? No later than the second quarter of 2023. Here too, explains De Guindos, the data will be the starting point for the discussion. For example, if the recession is more severe than expected, then the pace will be recalibrated.
There was also a reference to Italy. According to the number two of the Frankfurt institution, “very prudent and cautious public policies in recent years have done the country good, which is the only one with Germany that has recorded a budget surplus”. Italy’s problem, and De Guindos reiterates it several times, is not public finances, but economic growth. “The banks are solid, they have clean accounts,” he says. And he’s not worried about any situations of ferment on the markets: «Italy can handle future turbulence well. It must focus on economic expansion.”
Explicit mention also for cryptocurrencies, after the pyrotechnic collapse of FTX, with a contagion that is also spreading to other realities, such as Genesis, Solana and Binance. According to Christine Lagarde’s deputy, cryptocurrencies are risky, and people have so far not quite understood how to handle this asset. Platforms like FTX have non-existent governance, she pointed out to the audience. For this, she says, we must continue to monitor, increase regulation and surveillance, without forgetting consumer protection. Furthermore, you said, there are also consequences from rate hikes: «Our normalization is obviously also having an impact on crypto». And then the warning. “I wouldn’t be surprised if there was another FTX,” said De Guindos. Eyes on the risk of contagion.