High interest rates expose German growth deficits
Prof. Dr. Moritz Schularick (https://www.ifw-kiel.de/experts/ifw/moritz-schularick/), President of the Kiel Institute, comments on the European Central Bank's decision today to raise key interest rates by a further 0.25 basis points:
"The European Central Bank (ECB) continues to make economic history. After the historically exceptional zero interest rate phase of more than 6 years, the drastic speed of the key interest rate rises within just one year to now 4.25 percent is also historically exceptional.
The ECB has effectively shown its teeth in the fight against inflation, with the inflation rate roughly halved from its peak. From a risk management perspective, after such sharp interest rate hikes, there is much to be said for now waiting for the effects on the real economy and taking a pause to be able to validly assess the impact of the rate hikes.
The effects are now clearly visible: the real estate market has collapsed [the Kiel Institute will publish new data on the GREIX real estate price index for the 2nd quarter on August 3] and corporate lending has fallen significantly. The clouds in the economic sky are darkening, and in particular the weakness of growth in Germany is now becoming clearly apparent.
However, attributing the causes of this weak growth to the ECB alone is not enough, as a look at our European neighbors, all of whom are showing greater economic momentum, shows. If Germany does not want to become the "sick man of Europe" once again, it must now courageously turn its attention to the growth sectors of tomorrow instead of fearfully spending billions to preserve yesterday's energy-intensive industries.
This includes now quickly addressing the shortcomings and missed opportunities of the past decade: the sometimes bizarre backwardness in all things digital, the sharp decline in state capacity and public infrastructure, as well as the lack of a meaningful strategy to improve the shortage of housing and increase immigration to deal with the effects of an ageing workforce.”
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Prof. Dr. Moritz Schularick
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