To many seasoned observers of monetary policy, the following two statements are contradictory. The eurozone faces a considerable threat of recession later this year. Even so, the European Central Bank should withdraw monetary support from the eurozone economy and raise interest rates.
For years it has been the correct response for European central bankers to support spending in difficult times with looser monetary policy and to do everything possible to avoid a recession. After all, the ECB won acceptance as a powerful and respected institution only when the central bank, led by then president Mario Draghi, pledged to do “whatever it takes” to boost the continent’s economy almost exactly a decade ago. The promise of unlimited monetary firepower quickly ended the eurozone crisis.
In 2022, the circumstances are not remotely similar to 2012 and policy needs to adapt accordingly. Ten years ago, Europe was engaged in an austerity drive to improve public finances, unemployment across the bloc was over 10 per cent and rising, inflation was only a little over 2 per cent and falling. That was an economy that needed stimulus.