US Federal Reserve Emergency Brake: Now it is becoming dangerous for Europe

The pressure on the Biden administration continues to build. The US and “Bidenflation” are becoming a “nation of inflation”, as the opposite political camp likes to propagate. However, concerns about a further decline in consumption that will follow are justified. The economic growth that is recovering due to the Covid pandemic would thus be jeopardized. The result would be unemployment. A vicious circle would start.

The pressure on Europe is growing

To stop inflation, the US Federal Reserve has now pulled the emergency brake. The fear of loss of control and runaway inflation is too great. Fed Chairman Jerome Powell saw the gravity of the situation when he announced a record 0.75 percentage point hike in interest rates in Washington on Wednesday. It is the biggest leap since 1994. This step was long overdue. But Powell has already announced in a press conference that at the next Fed meeting it could rise by 0.5 or 0.75 percentage points.

With the Fed’s decision, one thing is now clear: still in pandemic times, in the midst of the war in Ukraine, on the brink of an unprecedented global famine and climate crisis, the race for the right answers has begun. This can be particularly dangerous for Europe. Because the pressure on the European Central Bank (ECB) and its boss Christine Lagarde to finally act is increasing. Inflation in the Eurozone also continues to rise. Orientation to Fed decisions seems inevitable in the medium term.

Christine Lagarde: The head of the ECB is under pressure. (Source: ANP / imago-images-pictures)

The disadvantage of the rise in reference rates is not only a further fall in share prices, an increase in interest rates on the real estate market and the risk of investments and therefore of the economic crash. A newly looming sovereign debt crisis is particularly crucial for Europe. Debt EU countries still need low interest rates to reduce their deficits again, especially after Covid’s major economic recovery programs.

As Germany is now co-responsible due to Eurobonds, it could be hit by a sovereign debt crisis even though it is actually doing well. And it is not clear how strong the Federal Republic is in the midst of the war in Ukraine. The country’s economic model, which is based on the import of cheap raw materials, must be completely, and therefore expensive, turned upside down.

The western dilemma

Fed chairman Powell summed it up when he said: “The consequences of the war in Ukraine are only now becoming really clear.” According to him, countries around the world are struggling with inflation, sometimes far more so than in Europe and the United States.

In addition to the supply chain problems caused by the Covid pandemic, which lasted much longer than expected, the ever-increasing prices of raw materials, energy and food are impacting. Anyone who listens to Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskyy can imagine that things are more likely to get worse than better.

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