There is no such thing as a shoe that fits everyone. The same shoe will be so loose on one person that it will give them blisters, while someone else won’t be able to squeeze their feet into it. Divergent shoe sizes are the solution to this problem, obviously. One size fits all does not apply to monetary policy in the eurozone either, but the solution is more difficult.
We have one currency, so we can also have only one ECB interest rate. But where the interest rate is too high for one country, it is too low for another. And that leads to differences of opinion. In recent months we hear politicians from Spain, Portugal and Italy warning about the negative economic consequences of new interest rate hikes. Dutch politicians are less inclined to get involved in ECB policy. And if they did stir the pot in the past, it was more because they thought interest rates were too low. Very likely, the ECB will announce a new interest rate hike from 3.5 to 3.75 percent on Thursday, July 27.
The reactions from Southern Europe are understandable. Unemployment is a lot higher there than it is in the Netherlands. In Portugal and Spain it has even been rising again since last summer. And while the Netherlands and Germany had inflation well above the European average in June, Southern Europe did not. Spanish inflation has even dipped below 2 percent, the ECB’s target. This, of course, befits lower interest rates than ours, where the inflationary risk in particular sets the scene.
The classic problem of a currency union is “asymmetric shocks”. These are shocks that affect the currency area differently everywhere. Ironically, the shocks of recent years - a pandemic, a war with an accompanying energy crisis - have actually affected supply and demand very similarly in different countries.
So where do these big inflation differences come from? Surely the main role here seems to be played by the government (including Minister Kaag and her predecessor Hoekstra). Whereas Italy, Spain and Portugal provided a net stimulus of about 1 percent of gross domestic product (GDP) through their budgets between 2019 and 2023, Germany and the Netherland did so by 4.5 and 3.5 percent, respectively. No argument about the intent of compensation measures - protecting unlucky people - but it was quite liberal and unfocused. That is throwing oil on the fire. In short, governments gave themselves an asymmetric shock here.