During this 2021 we are living in the Eurozone the sixth consecutive year in which the European Central Bank is lending money to European states and banks at 0% interest. In other words, Europe has been trying to boost the economy through 0% loans for six years in a row.
“The rationale behind this strategy is that if a commercial bank receives money at 0%, it will lend at very low interest rates, the population will be encouraged to consume more and the economy will grow”.
The problem is that this theory does not take off in Europe, where we are accessing super low loans and mortgages but the population continues not to trust and therefore not to consume at the levels that our European rulers would like for our economy1:
1 Spanish Consumer Confidence Index. Source: Bank of Spain, July 2021. Own elaboration.
Seeing that the strategy of offering 0% money is not working, the European Central Bank has taken an even more drastic initiative for recovery… injecting free money not to the banks, but to the states!
Specifically, the European Central Bank is going to inject 750,000 million euros into Europe, of which Spain is going to take a whopping 140,000 million euros.
Now, the question is: what effects can this “free” money sent to us from Frankfurt have? In my opinion, we can see ‘a priori’ three consequences:
- Nothing is free and what Europe is giving us is a 0% loan that we Spaniards will have to pay. This new super loan is added to the large debt that we have already assumed. A debt that according to the latest data and without the last European “gift” stands at 125.2% of GDP; basically we will have to be working for more than a year just to pay our debts.
- Prices will rise as a consequence of a generalized and artificial increase in the different national sectors. If all sectors have more money, the price of goods will rise; it will be an artificial rise because it will not be sustained by their production but by an unreal injection from Frankfurt. However, this unreal injection will be very real for Spaniards who have been seeing for several years how the price of goods continues to rise in the opposite way to our consumption…
“The evolution of consumer prices (CPI) will be affected by all these packages and economic aid from the European Central Bank. An evolution that is going to touch the maximum of the last six years foreseeably next month2″.
2 Consumer Price Index in Spain. Source: National Institute of Statistics, July 2021. Own elaboration.
The real impact of this investment on the Spanish economy. There has been talk of the sectors that will be promoted and how the investment will be diversified. However, we do not know how many new jobs will be created (or maintained) thanks to this aid and that, once they disappear, they will not be destroyed with it. It is true that there are sectors that we have to push and finance, but I consider it a mistake to finance unprofitable companies that depend exclusively on economic aid and not on their production capacity.
“One thing that has been made clear is that of the €140 billion we will receive, €72 billion will be non-repayable, just over half of the total loan.”
To conclude, I believe that Europe’s aim to help the hardest hit states and to finance them is a good one and a genuine effort that refers to the popular European cooperation that motivated us to come together several years ago.
However, the question I keep asking myself is whether this mega heel is the right way or whether it should be accompanied by some additional measures, what do you think?
