The nightmare continues. THE winds of war go crazy in the East, the barriers between economies, as well as the cost of money, increasingly to the detriment of the poorest. Bad central banks, at this point, they can do very little. "Problems will only be solved when the war ends." Word of Mario Noera, professor of economics of financial markets at Bocconi, one of the most attentive observers of the macro dynamics between the various areas of the planet. But this time, the crux of the matter, included the fight against inflation, does not pass through the markets. First we need to break the vicious circle of armed confrontation.
“It's not about being pacifistic or not. It takes a symbolic moment but also substantial respite to defuse the bombs. A time out like in basketball could be enough to get out of a dangerous spiral especially for Europe which can only find its role in a multipolar world”.
Do you see a sign in this direction?
“No, at least for now. Mine is just a wish. But the equivalent of would suffice whatever it takes of Draghi, a push to deflate the emergency. Let's be clear, it's not a question of being a pacifist or not but of taking back the wheel which today is not governed by anyone».
Speaking of Draghi, the ECB is preparing to raise rates again. Under the pressure of inflation but without taking into account the fight against the recession. It's a dangerous turnaround. Or not?
«The conduct of the ECB, like that of the other central banks, is to follow the route of the Fed. An obligatory route because, in reality, Europe would not need such a move. But in a floating exchange rate regime if you don't follow the Fed's monetary policy you bring back the inflation caused by a massive devaluation of the exchange rate. In this regime of flexible exchange rates it is almost inevitable for the ECB to follow the attitude of the American central bank. This was clearly seen with the pound crisis: it wasn't just the announcement of a dissonant fiscal policy that caused the currency and consequently the gilts to plummet: at a time like this any counter-cyclical policy would not be accepted by the markets».
No doubt, then.
"Unfortunately. I am convinced that this is not the therapy Europe needs: sure, it can defuse some accelerating factors deriving from the strong dollar, but not the problem. That will only be resolved when the war ends."
At least that goes for Europe…
“In America there are internal matrices that explain inflation. I don't know whether the Fed's therapy is adequate or too violent to correct the excesses linked to the acceleration of wages and consumption. But in the US, the classic response to price increases makes sense. I don't know how to evaluate the dimensions of the maneuver which will last a while yet, even if I believe that the objective is to crush the expectations of increases rather than reaching a real recession. When they see the effects on the economy the Fed will stop. But the cycle of increases is not over yet: the path to Europe is very narrow".
What is responsible for the Fed's change of course, from a dovish to a very aggressive hawk. Is there a political reason?
«More than anything else, there is a problem with the reputation of the central banks. The Fed wavered a lot last year and so it has worn down its credibility. Powell thus restores his reputation for the latter part of his term. The squeeze then intersects with the will of the Democrats not to present themselves in the midterm elections with rising gasoline. But I don't think that the elections, although very important for the future balance of the world, have conditioned the rise in the cost of money».
Meanwhile, the advance of the dollar is reshuffling the cards for the planet. The World Bank and the Monetary Fund have raised the alarm about the fate of the poorest who risk starvation…
«The situation is objectively very bad, even looking at it only from a macroeconomic point of view, without considering the other risks. The trigger of the crisis is geopolitical. But it is not only the consequence of the war and the risks it brings with it. If anything, it is the result of a competitive and non-cooperative approach between the powers. It applies to Russia but also to China and its blackberries on Taiwan. The picture is changing for the worse. The benefits of a long season of globalization (expansion of trade, low inflation) have triggered the reverse".
A phenomenon that was perhaps predictable. Also because China is undermining the US primates…
«But we could have hoped for a low-intensity conflict situation, destined to be diluted perhaps over decades like a new Cold War. Instead the times of the conflict are much faster. And this has led to the repositioning of the players in the field, increasingly sensitive to military confrontation, the true axis around which the world is aligned today".
The consequences? What spaces are there for Europe?
«The main effects are very destructive for the European Union which has to manage complicated processes: in terms of energy prices but also of the production activities to be reconverted in the face of less open trade. A big problem for Italy and Germany who have benefited from low-cost energy and the opening of commercial outlets in the East».
How to react?
«The conversion of the model must be done quickly but will only be successful with the end of the war; the acceleration of the conflict and the scarce ability to react of the various states lead to an explosive mixture. We need the end of the war, a symbolic moment in which we leave the military leadership and think. Otherwise, an increasingly ideological and less pragmatic conflict will exacerbate, in which we risk losing sight of the objective».
Meanwhile in Europe, the summit between France and Germany, which has always been the backbone of the Community, is off for the first time. What a mess…
“It's not just confusion. The crisis has highly asymmetrical effects on countries because the community has not made a leap in institutional quality but has remained a confederation of states that feel sovereign. And so, when interests do not coincide, it is hard to find a synthesis. Moreover, when geopolitics tends to prevail, even previously marginal countries become central. And when the word goes to arms, one no longer looks to reason or interests. Europe underestimated the impact of the war on the EU a year ago».
And today we are left with an almost insoluble energy crisis.
«Energy, price cap, energy savings. They all seem like attempts to buffer a situation that you don't know how to deal with. The opportunity to intervene at the right time has been missed. In March it made sense to propose a gas ceiling as Draghi had done who, as he had demonstrated at the time of the ECB, is very clear of the importance of words. As well as the whatever it takes worked thanks to the deterrent effect of words, then the ceiling proposed by a united Europe would have had a calming effect. Today it is more difficult: we risk penalizing the suppliers who have allowed us to reduce our dependence on Russia. The alternative is to leave the prices free but act on the bills. Feasible but expensive for public debt, some can do it and some can't. The only way is to act like a federal state as happened with the Recovery Fund and give everyone oxygen. But if you don't succeed, you come out very badly".
In this context, the Meloni government makes its debut, with a clear sovereign imprint. Is there space for that?
“I think there may be a sovereign argument in favor of Europe. I don't know how to evaluate the quality of the future government team. But it could make sense to defend national industry in a very delicate moment. We, but not only us, risk losing pieces of industry to the benefit of countries with much lower energy costs. It is a European problem, therefore to defend pieces of industry, therefore of economic sovereignty, today you cannot do without Europe. The only winning path is not autarkic, and perhaps the centre-right has understood this. But the situation today is so ideologically tight that it is difficult to get out of the box. It also applies to the left which makes the mistake of dividing the world for or against Ukraine, without assessing the complexity of the situation".
Is it possible to get out of the logic of confrontation?
«I have the impression that an underground debate is underway in the US which will develop after the vote on the next steps. In both liberal and conservative circles, the search for a common ground to get out of this complicated situation is making its way, more towards China than towards Russia. But it is enough to read Foreign Affairs to understand that the moderate front has great concerns about the risks of the situation. And Obama did the same. It is clear that the game is in the hands of the US, but one gets the feeling that Beijing is ready to pick up the ball».
In that case, could we go back to talking about a drop in interest rates?
Indeed, the markets have now factored in so many negative elements that they take a severe recession for granted. If there were even a slight sign of an inversion, the economy would take off».
Otherwise?
«I see it badly. Things have come together so well, from the increase in energy to the drop in the dollar and the increase in debt that, if we don't reverse course, we risk slipping into an epochal crisis. More than a recession."
