A study by the bank affirms that the increase in inequality tends to undermine faith in public institutions
The ECB grossly underestimated inflation. It is no worse forecaster than the Fed or the Bank of England. But, unlike its counterparts, it hasn’t raised rates yet. A new ECB study claims that rising inequality tends to undermine faith in public institutions. It’s one more reason to get your act together.
Euro zone inflation was two percentage points higher in the first quarter than ECB staff expected in December. It is the biggest mistake since those projections were first issued, in 1998. It is true that the Fed and the Bank of England also erred, as the ECB pointed out on Thursday. And the enormous rises in raw materials, difficult to foresee, are largely responsible. But that will not free the central bank from public opinion.
Christine Lagarde has not yet raised rates, unlike her counterparts. She has justified this by saying that the war posed greater economic risks to the euro zone than to the US But her staff’s predictions for long-term inflation also supported delaying hikes. Forecast errors make further delays more difficult to defend.
The ECB’s mandate to safeguard price stability is reason enough to act. As if anything else were needed, a study published Thursday by the bank revealed that citizens’ trust in it tends to be lower in countries with greater income inequality. Furthermore, those who perceive inequality to be too great tend to show less trust in the central bank and other EU institutions.
With soaring prices hitting the poor hardest, faith in the ECB could be undermined if the public – especially in Germany, where high inflation is anathema – believes it is not acting decisively enough. That would be worrying for an embryonic monetary union, which lacks adequate fiscal support. The ECB, once credited with saving the euro under Draghi, could then be more of a hindrance to the single currency than a help.
