The influence of the European Central Bank on inflation

Every product that contains energy has become more expensive. The European Central Bank (ECB) can do little about this, because most of the energy used in Europe comes from outside Europe. So in Europe we have become somewhat poorer and the exporting countries have become somewhat richer. Adjusting interest rates partly determines how expensive money is in real terms. The second instrument the ECB uses, is buying up government debt. De Vries says that this also implicitly drives up interest rates and that they could or should have phased this out earlier. The ECB does have an effect on the so-called second-round effect of external inflation, such as the rise in energy prices. If wages rise because of price increases and then prices rise again, the ECB can intervene. However, it is important to consider the risk of inflation: if energy prices fall again in the foreseeable future, it is unnecessary or even harmful to take rigorous measures.

Position of the ECB

It is also difficult for the ECB to take tough action at the moment. De Vries points to the fact that the ECB's balance sheets are full of about half of Europe's national debts. If the ECB were to take tough action, there is a risk that the Southern European Member States would face higher interest rates than Northern European Member States, since they hold a large proportion of the national debts. In practice, the ECB is financing the national debt, which is explicitly forbidden in the Maastricht Treaty. This is already causing problems: according to De Vries, the money created by buying up sovereign debt has flowed into equities and the property market, which is why house prices are now so high. Unfortunately, the ECB does not seem to be finished with its programmes of quantitative easing: Lagarde, the president of the ECB, has indicated that the vulnerable Southern European countries may require another buy-up programme according to the ECB.