The ECB, trapped in a quagmire of rates that it has created

The ECB is in a self-created bind. Should you focus on the need to control inflation or worry that it could hurt growth? It is a dilemma that in Europe is aggravated by the negative rate, an already unsustainable rarity.

In an ideal world, the ECB would have started raising rates months ago. Its main rate is stuck at -0.5%, despite inflation running at 7.5%. But his own guidelines promised that there would be no rate hike before the end of his asset purchases. And errors in his own forecasts delayed his reaction. This has meant staying stuck with negative rates for longer than necessary, while other banks, such as the Fed, are already moving.

Christine Lagarde has hinted that rates will rise in July, for the first time since 2011. Markets are expecting a 0.25% rise in the deposit rate, a balance between hawks and doves. That would leave Europe with a negative rate, at least until September. The real question is where the trip ends, and what the ECB thinks is the neutral rate, neither flexible nor restrictive. Current thinking suggests at least 1%.

But the ECB will be in sadly familiar and complicated territory during the return to normalcy. The risk premium on Italian debt has risen to almost 200 basis points, compared to 130 at the beginning of the year. Rising premiums will hurt the indebted economies of the South and dampen investor confidence. The ECB has hinted that it might tackle it, but the tools designed to help the weakest are politically controversial.

And it is now in the delicate position of starting its hike cycle, just as the world economy begins to falter. European central bankers, humiliated by past mistakes, may rush to normalize monetary policy, despite the looming crisis. Or, they will delay it. That could leave the ECB stuck with rates too low to control inflation and a stagnant economy, the worst of both worlds.