He has seen the great economic crises of the last 15 years in Europe from privileged chairs… or from torture racks, depending on how each one lives these interesting times. Olli Rehn (Mikkeli, Finland, 60 years old) was the Commissioner for Economic Affairs when the euro crisis was worst and has been Governor of the Bank of Finland since 2018 and, therefore, a member of the Governing Council of the European Central Bank (ECB). His task now is not easy. It is up to him, along with his colleagues in this body (in which there are only two women and a good twenty men), to square a diabolical circle: curb inflation without losing sight of the risks of financial fragmentation in the euro zone or plunging the economy in another crisis when in Europe there is an open war between two states for the first time in almost 80 years, which, in turn, puts pressure on prices.
The ECB’s response will be decided in the coming months. Or better write in the next few weeks. And there Rehn is clear about what he is going to defend: “We are seeing signs of second-round effects [en la inflación]. And that is why, in my opinion, it is important that we prevent inflation expectations from [alta] become the reference. It is critical that we send a signal that these expectations that we are currently witnessing will not take hold. That is why I think it is reasonable that, rather in the third quarter, in my opinion, in July, we start to raise rates”.
He speaks with the caution of a central banker. Conditionals, periphrases and “I believe” populate his language in a meeting with journalists from various media, including EL PAÍS, in a bucolic palace on the outskirts of Salzburg that was one of the settings in which it was filmed. Smiles and tears and where the European Commission has organized the seminar Global Europe about an uncertain future, according to the title.
But behind all those verbal precautions his position is clear. It is now time to “normalize” monetary policy, that is, we must end the bond purchase programs and start raising interest rates, now at zero. He insists that it is time to send a message: “We need to send a signal to our citizens, to the markets, to the unions, to the social agents that we are taking high inflation seriously.” He does not want the effects of the second round to consolidate and that with high expectations a third will arrive. “Our first mandate is price stability,” he recalls, looking at the ECB’s founding rules taken directly from the Bundesbank.
Rehn knows that this movement has risks: “We have a real dilemma.” For him it makes sense that, on the one hand, monetary policy accompanies fiscal policy to ensure recovery. On the other hand, however, he firmly believes that the time has come to tackle inflation.
The war in Ukraine has brought to the (economic) memory of Europeans episodes lived in the seventies: high prices, high unemployment rates, stagnation, if not recession. In a word: stagflation. Rehn rules out that scenario because “there are a lot of differences in the current situation compared to that.” But he does admit that there are indications that the ghost is there. We are seeing some trends stagflationary. And that is precisely the reason why in monetary policy we are between a rock and a hard place, or we are facing a very complicated dilemma”, explains the now governor of the Bank of Finland.
He knows in depth all the sides of the coin.
This former professional footballer, who maintains a passion for this sport and asks his interlocutor about his team as soon as he finds out the nationality —”Real or Atlético?”—, knows that returning monetary policy to traditional tracks can lead to the risk premium to holders again. “I am aware of the unjustified fragmentation of financial conditions between Member States. On the other hand, there are also economic fundamentals or other factors that explain it. So we will see some differences in risk premiums. But what we have to worry about is this unjustified fragmentation. That’s why we created the Pandemic Emergency Purchase Program in March 2020, which helped counteract this fragmentation. In my opinion, very successful. At the same time, we cannot condition monetary policy on fiscal policy”. Consequence: the time has come for the price of debt to start rising for some countries (Greece, Italy, Spain, Portugal, Belgium, France…) and their companies.
Russia’s energy dependency
From what was seen in times of pandemic, Rehn has learned the usefulness of having tools to stop the “unjustified fragmentation” of financial markets in the euro zone. Hence, without ever losing sight of the fact that it is now his turn to “normalize” monetary policy, “at the same time, we must be vigilant and be aware of unjustified fragmentation.” To which he adds: “To do this, it would be very useful to indicate that we are willing to act as appropriate and that we have the means to do so.”
The conversation takes place on Friday afternoon, the sixth package of sanctions against Russia, in which it is proposed to stop buying oil from Moscow, has not yet been closed. Then, probably, it will be the turn of the gas. That complicates the economic picture a lot, but Rehn’s Finnish passport and the history of his country influence his response: “We are faced with the challenge of how to ensure that we reduce our energy dependency on Russia. I am following, for example, the German debate on this, and there have been different estimates on this. It will be very difficult, but not catastrophic for the European economy. And, in my opinion, we must keep in mind that the Member States of the European Union, together, are financing close to 1,000 million euros a day to Russia and that is helping to make Putin’s war machine work.
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