19.08.2022, Hessen, Frankfurt/Main: Die Zentrale der Europäischen Zentralbank (EZB) reflektiert das letzte Abendlicht über den illuminierten Mainbrücken. (Aufnahme mit längerer Belichtungszeit) Foto: Frank Rumpenhorst/dpa +++ dpa-Bildfunk +++

The economic data published by the Federal Statistical Office on Thursday offer a false sense of security. The German economy grew by 0.1 percent in the second quarter. A plus, despite the war and inflation – that’s something! One might think. However, a look at other macro data gives a different, more realistic impression.

The Bundesbank is expecting a recession in the fall, managers’ business expectations have been falling for months and Germany’s export surplus – the backbone of local prosperity – is history. Inflation, which is at once the consequence, the cause and the intensifier of the crisis, makes all of this worse.

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Private consumption, which kept the economy on track in the spring, is therefore unlikely to serve as a stabilizer for much longer, as the reserves of German citizens are slowly but surely being used up. In the past few days, the price of electricity has again skyrocketed to unprecedented heights, and the price of gas has cracked the 300 euro mark again. The true cost hike for consumers and the economy is yet to come.

In this situation, the central bankers have their most important regular meeting in America’s Jackson Hole, and they are under enormous pressure. Because the starting position is clear: the US Federal Reserve and the European Central Bank (ECB) have made money cheaper and cheaper over the years through bond purchases and low interest rates, thus laying the foundation for inflation.

For a long time this had no consequences. But then the prices went up. Instead of acknowledging the problem, central bankers denied it and continued their policies. When energy became more expensive after Russia invaded Ukraine, it was too late. The target of 2% inflation is a long way off.

The question arises as to what means the central banks have to lower prices again, or rather: how quickly they take effect and what the undesirable consequences are. The tool of choice is the interest rate screw. While the Fed has recently turned it around twice by 0.75 percentage points, the ECB remains hesitant. Concern about the level of debt in many euro countries is too great. As for the timing effect, it will take months for the rate hike to reach consumer prices. After all, many banks have already eliminated custody fees.

The currency watchdogs, ignoring all criticism, have maneuvered themselves into a situation in which good decisions can no longer be made. If they continue to tighten monetary policy, it will damage the already weak economy. Unemployment and loss of prosperity would be the result. On the other hand, inflation should fall over time. However, if they keep monetary policy loose, inflation rates are unlikely to be contained, even if the economy would be happy about easier access to money and urgently needed investments. It’s a choice between two evils.

At the end of the central bankers’ deliberations, however, there should be the realization that there is no getting around a tougher monetary policy. For one thing, the labor market is relatively stable in both the US and the EU. Above all, no stabilization is possible until prices are also stable. This applies in particular to the ECB. Because the low interest rate level in the euro zone weakens the euro and also draws capital away. All imports for the euro economy that are billed in dollars thus become even more expensive and increase inflation all the more.

Fed Chair Jerome Powell’s speech on Friday is being eagerly awaited. Every syllable of his words will weigh heavily in the markets, every hint can change prices. Clarity is needed now. The message must come from this meeting: tighter monetary policy is needed. The ECB should then also orientate itself on this.