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Can the ECB Tame Inflation?

It’s the European Central Bank’s turn to raise rates—but it might not solve the problem.

By , the newsletter writer at Foreign Policy.
Christine Lagarde, the president of the European Central Bank, gives her signature to be printed on euro bank notes in Frankfurt am Main, western Germany, on Nov. 27, 2019.
Christine Lagarde, the president of the European Central Bank, gives her signature to be printed on euro bank notes in Frankfurt am Main, western Germany, on Nov. 27, 2019.
Christine Lagarde, the president of the European Central Bank, gives her signature to be printed on euro bank notes in Frankfurt am Main, western Germany, on Nov. 27, 2019. DANIEL ROLAND/AFP via Getty Images

Welcome to today’s Morning Brief, looking at the European Central Bank’s new interest rate hike, Mario Draghi’s resignation in Italy, Russia’s Ukraine aims, and the U.S.-Canada-Mexico energy dispute.

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If you would like to receive Morning Brief in your inbox every weekday, please sign up here.

Welcome to today’s Morning Brief, looking at the European Central Bank’s new interest rate hike, Mario Draghi’s resignation in Italy, Russia’s Ukraine aims, and the U.S.-Canada-Mexico energy dispute.

First, a note to readers: Morning Brief comes to your inbox every weekday morning free of charge, but our work is only made possible by the support we receive from FP subscribers. Consider becoming one today, and unlock every FP article as well as insider benefits. 

If you would like to receive Morning Brief in your inbox every weekday, please sign up here.


The ECB Prepares Rate Rise

European Central Bank (ECB) chief Christine Lagarde is set to announce the bank’s first interest rate increase in 11 years today as Europe seeks to tame rapid price inflation.

The increase, estimated at between 0.25 and 0.5 percent, would still make ECB lending rates among the lowest in the world and would keep the European Union behind recent hikes by the U.S. Federal Reserve. But coming at a time when the eurozone’s economic outlook is uncertain, the ECB intervention risks slowing already sluggish growth and triggering a recession.

The ECB has waited this long to raise rates because, unlike in the United States, Europe’s central bankers are afraid not of a wage-price spiral—where prices increase to match rising wages—but of the spillover effects of the ever-increasing cost of energy, especially gas, driven by the war in Ukraine. Energy costs increased by 42 percent in June, compared with the same month last year, according to the EU statistics agency Eurostat, contributing to a June EU inflation figure of 8.6 percent.

As Foreign Policy’s Christina Lu wrote this month, the combination of high fuel prices and the threat of a gas shutoff from Russia has European policymakers considering a nightmare energy scenario this winter.

So, what can a central bank do about fuel prices? Not much, said Jacob F. Kirkegaard, a senior fellow at the Peterson Institute for International Economics, but it’s going to try anyway.

“All they have is a big sledgehammer. And you don’t necessarily want to sink the economy in order to try to get energy prices down. Because even if the European economy goes into a deep recession, maybe Vladimir Putin doesn’t increase energy supplies over the winter, and prices don’t come down. So, the ECB is really in a corner because of the sources of inflation not being something that they can really affect,” Kirkegaard told Foreign Policy.

As well as trying to preventing a blocwide recession, EU leaders must also account for the differing economic performances of member states. An increase in borrowing costs isn’t as damaging for Germany in the same way it might be for Italy, whose debt-to-GDP ratio of 150 percent is second only to Greece among eurozone countries.

Keeping eurozone countries from suffering different effects of the rate rise, a process known as fragmentation, will be one of Lagarde’s key challenges both today and later in the year, when new increases are expected. Lagarde is set to unveil an anti-fragmentation program to help calm markets, although the details are still under wraps.

And while rate hikes by the Fed are creating ripple effects throughout the global financial system, the wider impact of the ECB decision is likely to be much smaller by comparison, since relatively few countries hold euro-denominated debt.


Keep an Eye On

Italian government collapses. Italy’s shaky economic situation is unlikely to improve in the near term. Its current government, headed by the man credited with preventing the eurozone’s last meltdown, Mario Draghi, has collapsed after the right-wing Forza Italia and League parties boycotted a confidence vote on Wednesday night along with the Five Star Movement. Draghi won in a 95-38 vote in the 315-member Senate but immediately tendered his resignation for the second time in a week after his key coalition partners deserted him.

The move comes a week after Five Star—with the exception of a pro-Draghi faction—withdrew support and boycotted an earlier confidence vote. Draghi sought to resign last week on the grounds that he would not govern without Five Star support, but Italian President Sergio Mattarella refused his resignation. This time, it appears to be final. Draghi announced that he would resign today; Mattarella has asked him to remain in office in a caretaker capacity. Elections are likely to be held in October.

Polls suggest that the Brothers of Italy—a far-right party with neofascist roots—could lead the next government. Giorgio Ghiglione profiled its leader, Giorgia Meloni, for Foreign Policy in 2019.

Sunak vs. Truss. Britain’s next prime minister will be either former Chancellor of the Exchequer Rishi Sunak or Foreign Secretary Liz Truss, after the two made it to the final round of the Conservative Party leadership contest. Truss edged out former Defense Secretary Penny Mordaunt, gaining 113 votes to Mordaunt’s 105, while Sunak led with 137.

Truss is currently favored by British betting companies to prevail in the head-to-head race among party members, the results of which will be announced on Sept. 5. In the last leadership election, approximately 160,000 party members (less than 0.3 percent of the British population) voted to determine the next prime minister.

Erdogan’s Syria incursion. Turkish President Recep Tayyip Erdogan said his plans for a military offensive in northern Syria remain on the table in comments carried by Turkish media following his summit with Russian President Vladimir Putin and Iranian President Ebrahim Raisi this week. Erdogan also criticized U.S. support for the Kurdish People’s Protection Units (known as the YPG), which Washington relies on in its anti-Islamic State operations.

“America has to leave east of the Euphrates now. This is an outcome that came out of the Astana process,” Erdogan told reporters. “Turkey expects this as well because it is America that feeds the terrorist groups there.”

Russia’s aims. Russian Foreign Minister Sergey Lavrov gave a rare insight into Russia’s overall plans for Ukraine in comments to state media on Wednesday. Lavrov said peace talks were currently impossible but blamed the West rather than Ukraine for avoiding negotiations. Lavrov said Russian goals for territorial control had shifted since March from beyond the Donbas to include Kherson and Zaporizhzhia regions “and a number of other territories.” Lavrov added that “geographical tasks” will extend further into Ukrainian territory as long as Western nations continue to supply long-range weapons.

The U.S.-Canada-Mexico standoff. The United States and Canada have requested talks with Mexico to resolve a dispute over the latter’s plans to further nationalize its energy market, which the northern nations say would breach the terms of the United States-Mexico-Canada Agreement. Mexican President Andrés Manuel López Obrador ridiculed the challenge to his energy policy at a press conference on Wednesday, saying that “nothing will happen.”


FP Recommends

FP columnist Lynne O’Donnell returned to Afghanistan this week, almost a year after its fall to the Taliban. From there, things went downhill quickly. As O’Donnell recounts in her latest column, she endured “three days of cat-and-mouse with Taliban intelligence agents, who detained, abused, and threatened me and forced me to issue a barely literate retraction of reports they said had broken their laws and offended Afghan culture.” She has now safely left the country.

Read O’Donnell’s account here, and then catch up on the reporting the Taliban would rather you didn’t see.


Odds and Ends

Japanese passport holders have the greatest freedom to travel of any nationality, according to the latest edition of the Henley Passport Index. The Japanese document allows travelers to visit 193 destinations without prior authorization needed, closely followed in second place by South Korea and Singapore with 192 each. The United States ranks a joint seventh on the list (186 destinations), while Afghanistan ranks in last place with just 27 destinations allowing easy passage.

See Also: Is It Time for the U.S. to Issue a Digital Dollar?

Colm Quinn is the newsletter writer at Foreign Policy. Twitter: @colmfquinn

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