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Mario Draghi at MIT: "Ukraine must win the war or it will be the end of the EU". The risks for inflation and recovery

Ukraine and inflation at the center of Mario Draghi's speech in Boston. As for inflation, "it will require a cautious continuation of monetary tightening". A paradigm shift is underway that will affect the future

Mario Draghi at MIT: "Ukraine must win the war or it will be the end of the EU". The risks for inflation and recovery

Draghi go back to talking about Ukraine e inflation. In the first trip to the United States after the end of his government (October 2022), former premier Mario Draghi received the Miriam Pozen Prize at the MIT (Massachusetts Institute of Technology), where he studied in the XNUMXs, awarded annually to people who have achieved significant results in the field of financial policy research or practice. In his broad and articulated speech, Draghi focused on two international themes which, together with the growing tensions with China, "have dominated international relations and the global economy in the last year and a half: the war in Ukraine and the return of inflation". Instead, he did not make any direct reference to Italy and its internal political situation. Here are the main passages of Draghi's speech at MIT.

Paradigm shift with war, inflation and China

The war in Ukraine and the return of inflation, together with tensions with China, have led to a "paradigm shift” which “may lead to lower potential growth rates and which would require policies that lead to budget deficits and higher interest rates,” warns Draghi. Globalization, which was thought to be "unstoppable", is instead in crisis. “The geopolitical consequences of a prolonged conflict on Europe's eastern border are very significant,” said the former ECB number one, adding that “the EU must be willing to strengthen its defense capabilities. We must be ready to start a path with Ukraine that leads to its accession to NATO. And prepare for an extended period in which the global economy will behave very differently from the recent past." 

The "brutal" war in Ukraine will weigh for many years

For Draghi, the "brutal invasion of Ukraine is not an unpredictable act of madness", but a new "premeditated" step in the "delusional strategy" of the Russian president and his imperialist foibles. For this reason, according to the former premier, “there is no alternative for the United States, Europe and its allies but to ensure that Ukraine wins this war. Accepting a Russian victory would deal a fatal blow to the EU”. Therefore, the EU must "welcome Ukraine and the Balkan countries" and we must be "ready to begin a journey with theUkraine which leads to his NATO membership".

While the war has contributed to rising inflationary pressures in the short term, it is likely to trigger “lasting changes that herald a rising inflation in the future,” Draghi warned. “In hindsight, it is probable that the monetary authorities should have diagnosed in time the return of persistent inflation. But especially in Europe, given the nature of a supply-driven shock, it is not clear whether acting faster would have much stemmed the acceleration in prices”.

Persistent inflation calls for “cautious” continuation of the squeeze

For Draghi “the inability of governments to promptly agree on a maximum price ceiling for natural gas has made the job of the ECB much more difficult. In any case, when central banks intervened, they demonstrated a strong commitment to keeping inflation in check and largely made up for lost time.

Thus, the fight against rising prices “will probably require caution prosecution of hold monetary, both through even higher interest rates and lengthening the time before their course can be reversed,” Draghi warned.

Risk of higher budget deficits

"Eventually, central banks will get the inflation rate back to their targets, however, the economy will look very different to what we are used to." The former prime minister is convinced of this, according to which "international tensions will continue to weigh on the growth rate and the 'reshoring' process to bring back strategic productions and reallocate supplies to reliable countries could lead to a higher level of inflation than in the past". Furthermore, "I expect governments to manage permanently higher budget deficits" to face new challenges, from the climate to defence, "without weakening the social protection that makes the EU unique". And “in the long run, interest rates are likely to stay higher than they have been in the past decade. At the same time, low potential growth, higher rates and high post-pandemic debt levels are a volatile cocktail, and inflation-tolerant central banks will not be the solution.

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