ECB before raising the key interest rate: It is important to prevent an inflation tsunami

EU countries are caught between containing price increases and managing the economic downturn. The euro zone in particular is suffering from the dilemma, since the European Central Bank will probably raise the key interest rate on Thursday in order to prevent an inflation tsunami.

The different levels of inflation in the most important economies in the euro zone do not make the task of the ECB any easier. Raising key interest rates is a collective measure that cannot take into account individual inflation rates in different countries.

This will pose problems for many countries. "We have a single monetary policy for 19 different inefficiently coordinated budget policies. Enormous differences have emerged even between the large countries in terms of economic support measures," explains Pierre Jaillet, economic researcher at IRIS and the Jacques Delors Institute: "We have the German A relief package of 200 billion euros was spoken. Even France has spent considerable sums since autumn 2021. And yet none of these measures have been agreed at European level."

Lack of coordination as the euro's Achilles' heel

In contrast to other large economies such as the US, where the link between monetary policy and economic measures allows for more effective action against the dangers of a recession, the lack of coordination is the Achilles' heel of the euro.

The S&P SMI Index is a powerful indicator of corporate purchasing activity: when it's below 50%, it's a sign that companies are saving in anticipation of bad times.

Businesses and consumers are experiencing income losses

The rising costs of basic goods for companies and consumers lead to a loss of income.

"We could think about how to spread the loss of income across the different social strata while protecting lower-income households," suggests Bruegel Institute's Andre Sapir: "It would also mean that people with higher incomes would suffer losses. We can in our economy does not compensate every single person and every company individually."

Governments will have to find the perfect balance between monetary policy decisions and economic measures. Otherwise the EU could come close to a recession.