3 min read 26 Jan 22
In a speech on 8 January1, ECB Executive Board member Isabel Schnabel raised the possibility that the energy transition could be inflationary. She added that in this case the ECB should act. It is indeed very likely that the energy transition will prove to be a sustainable source of inflation. But will the ECB really have the means to act?
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The markets are currently concerned about a possible return of inflation linked to the health crisis. Supply chain disruptions, high demand for release from containment and the slow return to the labour market of part of the population, particularly in the US, are the elements often put forward to justify this fear of rising prices. However, these factors do not seem to us to be sustainable and it is difficult in our opinion to see inflation settling at very high levels for these reasons.
Conversely, the issue of the energy transition is little mentioned, even though it constitutes a much more serious threat to price stability in the decades to come: rising carbon prices, taxation that penalises the use of fossil fuels, under-investment in this sector and the drying up of financial flows under regulatory pressure, and the slow rise of renewable energies, which will not be able to replace traditional energies quickly and at a reasonable cost. The subject mentioned by Isabel Schnabel is therefore central and it is desirable that the debates on inflation be refocused on the issue of energy transition.
Isabel Schnabel added that the ECB would act if necessary. But is there any doubt about this? Indeed, the very accommodating monetary policies deployed for more than a decade have been aimed at ensuring the sustainability of the single currency in a context of weak growth and ever-increasing government debt. The low rates applied by the ECB and the asset purchase programmes are, in our opinion, no longer an option but a necessity given the indebtedness of economic agents and of governments in particular. The ECB's room for manoeuvre to combat a significant upturn in inflation is therefore limited.
Under these conditions, the coexistence of the two strategic axes set by the European public authorities for the next 20 years seems, in our opinion, compromised: how can we reconcile a voluntarist energy transition, which is necessarily very inflationary, with the need to maintain very accommodating monetary policies in a highly indebted world with low productivity and growth?
Unless the productivity effort of the social body is spectacular in the future, it is to be feared that compromises will have to be found between the ambitions to preserve the climate on the one hand and the sustainability of the euro and our economies on the other.
1Looking through higher energy prices? Monetary policy and the green transition
Article completed on 10 January 2022 by Florent Delorme, macro strategist at M&G Investments.
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