The growing divergence between the US and Europe

In a global economy of communicating vessels, the cost of mortgages borne by Spanish families depends greatly on the decisions made by a non-EU institution, the US Federal Reserve. This close link between our economic environment in general and US monetary policy has become clear after learning of two relevant facts: the resilience of inflation in that country and the signs of strength of its economy. These vigorous results contrast with the weakness of the situation in Europe and the de-escalation of the CPI, variables that, after the understandable decision of the ECB this week, opened the door to a sustained (and highly anticipated) path of interest rate cuts.

However, relaxation is complicated since some members of the ECB will not hesitate to allude to the risks entailed by decoupling with respect to the American giant. In any case, everything indicates that the Federal Reserve will want to ensure the transitory nature of the rise in prices before reducing the price of money. At the moment, the CPI in the world’s leading economic power seems anchored at around 3.5%, and with little sign of falling given the strength of the labor market and demand. Given the proximity of the presidential elections, Washington is likely to err on the side of caution amid fears that a rate cut will coincide with a new rally in prices.

For its part, the ECB’s mission is to appease inflation, something it is already on track to achieve, with a CPI of 2.4%, justifying rate cuts over the course of the year. But the central bankers most concerned about inflation allude to the risk of depreciation of the euro entailed by a growing differential in the price of money between both economies. Especially considering that oil, which is quoted in dollars, tends to become more expensive. Another factor is the resilience of inflation in the service sectors. Given these arguments, the ECB would do well to maintain its intention to adjust rates in June: if it does not do so, it risks going against the grain of the needs of its economy, something that could also weigh on the value of the euro. However, it is not clear that this is the path beyond June.

The inflection should have few consequences for the progress of the Spanish economy in the short term, unlike other community partners. But it presents added risks for investment and public accounts, two of our main fronts of vulnerability. A takeoff in business investment was anticipated over the next two years, under the premise of the strong interest rate cuts that were on the horizon. Expectations that are now cooling, and that could encourage companies to continue their debt relief process.

Regarding the deficit, the growth of the economy should bring us closer to the 3% objective by the end of next year. Beyond that, however, things are complicated by the double effect of interest rates on the financial costs of the State and on investment, a crucial factor to ensure sustained growth and a solid revenue base. In the event of persistent weakness, European fiscal rules—particularly those regarding debt, which will have the greatest impact—would require a fiscal adjustment that is difficult to assume, and therefore implausible: our accounts would have to abruptly leave the deficit behind. primary —outside of interest— to produce a surplus close to 1% of GDP, something that is only possible with strong tax increases or spending cuts that are difficult to assume. In the event of a more restrictive monetary policy than expected, a strategy is urgently needed to unblock investment and correct budgetary imbalances, taking advantage of the window of opportunity that the economic upturn gives us.