Guindos does not rule out that a recession in Germany due to the cut of Russian gas "drags" the eurozone

The Vice President of the ECB suggests a rate hike of more than a quarter point in September if inflation continues at high levels

MADRID, 6 Jul. (EUROPA PRESS) -

The vice president of the European Central Bank (ECB), Luis de Guindos, stated this Wednesday that the cut of Russian gas to Germany could lead the German country to a recession and this, in turn, could "drag" the whole of the eurozone .

In statements to the Cope chain collected by Europa Press, Guindos has underlined, however, that the ECB does not manage in its central scenario the entry of the European economy into a recession (several quarters of negative growth), although it does an "economic slowdown important" which, combined with high inflation, anticipates a "very complex" scenario for the coming months.

"The coming months are going to be very complex for the European and world economy due to the coexistence of high inflation with clear signs of an economic slowdown, which are already here. We have already begun to see that the consumption of families in Europe is suffering and That must be added to the uncertainty of the war, which is stopping many investment projects," he said.

The vice-president of the ECB has affirmed that the war in Ukraine affects Europe more than the United States, a country that is estimated to experience a short recession before returning to growth. "What the Federal Reserve does is important and what the United States does is important. There are people who give the United States a significant chance of having a short recession. And then it will go back up again," he noted.

The former minister has stressed that Germany is continuously monitoring the supply of gas from Russia because this can have a "significant" impact on its economy. "It can stop a large part of German industry, it can lead to a recession and a recession in Germany can drag down the entire eurozone," explained Guindos, who has advocated seeking energy alternatives in Europe so as not to depend on Russia.

In short, it is a "very complicated" context, Guindos said, in which the ECB's policy has to focus on price stability in order to reach its objective of 2% inflation.

RISE IN RATES IN JULY AND SEPTEMBER

To do this, monetary policy has already begun to normalize, with an already announced interest rate rise of 25 basis points on July 21 and another in September that, according to Guindos, "may be higher" than that quarter of a point if the inflation situation continues as before.

"It is a normalization of monetary policy that adjusts to the high inflation in the eurozone, which is clearly above 8%, and which is no longer produced only by food and energy, but is much more broadly based," has specified.

Guindos has recognized that raising interest rates to control inflation is a "bitter medicine", since it helps to moderate demand and consumption, which in turn has negative effects on economic growth. But he has insisted that price control requires raising rates, albeit carefully, so as not to provoke the undesirable effect of a recession.

"Inflation is an absolute evil. Much of the potential risk of recession is occurring as a result of inflation. This medicine, which is not easy to swallow, must be taken so that the economy heals and we can return to normality. You have to do it very carefully, because you have to produce a slowdown in demand without producing a recession. It is bitter medicine, but there is no alternative," he defended.

Regarding the depreciation of the euro against the dollar, the vice president of the ECB recalled that it is not part of the monetary policy to act in this field and explained that a depreciated euro raises, on the one hand, the costs of imports, including energy, but, on the other hand, it makes foreign sales cheaper.

BUDGETARY STABILITY PLANS

Guindos has pointed out that, during the years of the pandemic, there has been "practically an open bar in fiscal policy" and has highlighted the need for European countries to establish budgetary stability plans.

"That, without a doubt, will come sooner rather than later. Neither the European Commission nor we look at the sign of the governments. I believe that the Commission is going to focus on the stability of the budgets and that is going to be very different from what what happened in 2020, 2021 and 2022", he pointed out.

In this context, and as part of the normalization of monetary policy, the ECB is already stopping buying debt from other countries. "The ECB was buying all the debt issues and that will not last. The countries have to do their homework and they have to start showing that this debt can be placed at reasonable rates," he indicated.