The ECB has done its monetary work without consistent accompaniment of fiscal policies and reforms of the productive system. Governments, all governments, have not been up to the task. Paralysed by electoral anxieties and determined to inconvenience the public as little as possible, they have benefited from free credit to get by while waiting for the good times to return.
Since last summer, this dynamic has run up against the rise in the price of raw materials, essentially oil and gas, which have altered the cost structure and, in the absence of a response, have induced inflation that is incompatible with lax monetary policies, belligerent in favour of consumption and demand.
Without the European economies having consolidated their exit from the crisis and recovered what was lost to the pandemic, the ECB is now faced with the dilemma of continuing to sustain the recovery with more credit or acting to correct inflation to the desired rates of around 2%.
The first consequence is the return to positive interest rates, plus costs, which have been reflected in bond prices for some weeks now. The Euribor, the benchmark for a large part of mortgages, entered the positive zone (a few hundredths of a point) in April (average for the month) and a quarter of a point in the first days of May. The upward trend is evident and inevitable. How long? We will see, but it will not turn negative.
The other more consistent benchmark is the Treasury bond market. This week’s first auction placed one-year bills at 0.10 (38 tenths of a point more than the previous auction). 5 and 10-year bond prices are around 2% and 50-year bonds are above 3%. The yield curve is already steepening. Borrowing is hard.
The Spanish government needs 237 billion this year to refinance maturing issues (160 billion) and to finance further debt (70 billion). Fiscal consolidation (reducing the deficit and then the debt) is unavoidable, inevitable. Will they know how to do it, will they be willing to do it, will they have the courage and responsibility to do it? They can also choose to pass it on to the next person, whoever comes after them can do it.