ECB: The hawks cannot win

Opposing positions have clearly emerged at the ECB, leading for the time being to a “middle-road” outlook for monetary policy: For some (the “hawks”), inflation in the euro zone is becoming unacceptable and must be combated; For others, the war in Ukraine is creating a new environment where public spending will have to increase considerably and real growth will suffer in the euro zone. But the hawks cannot win: The war in Ukraine may last, potentially ensconcing the euro zone in a war economy with high government spending and scarcities (energy, other commodities, transport) and therefore inflation. In this type of economy, monetary policy supports the war effort; I nflation in the euro zone stems almost exclusively from the rise in commodity prices, which a restrictive monetary policy is powerless to correct; Italy’s situation is already a concern (zero potential growth, very low employment rate, very high public debt) and is set to get worse due to the country’s high dependence on imports of Russian energy.