Why EU Households Will End Up Paying A Double Tax

As announced on Thursday, the ECB will be exiting from Quantitative Easing, with non-conventional purchases of securities ending on July 1 and policy rates increasing by a quarter percentage point that same month. The ECB also added that, should the current inflationary outlook persist or deteriorate, subsequent hikes may be larger starting in September, ending the negative interest rate policy that has been in operation for almost a decade.

The background to those decisions relates to the inflationary dynamics observable since last summer, which misled many institutions – like the ECB and the IMF as well – into believing that they were largely transient. Instead, current inflation has revealed itself to be more persistent and higher than initially expected. As a result, workers have lost purchasing power, as their nominal wages have fallen behind price increases.

This is just another consequence that our economies have to bear following the Russian war on Ukraine, on top of the sanctions that the G7 and the EU have already imposed. Indeed, price rises in energy and food items have accounted, and still do, for most of the inflationary increase. Furthermore, those increases are now driving the surge of other items, related to manufacturing and services, for instance.

And yet, while gas prices have grown at exponential rates completely out of line with historical averages, production costs, and transportation charges, in all these months we have witnessed no initiatives to counter what has clearly become a speculative, more than a fundamental, trend. For instance, the EU could have considered greater coordination in making market purchases or other initiatives aimed at mitigating price increases, in the interest of consumers and business alike.

As if that were not enough, the EU has, instead, moved forward with its plan to ban sales of new fossil fuel cars starting in 2035. While we all agree on the need to safeguard the future of our planet, it is unwise to carry out that plan without considering what is happening today.

It took the war on Ukraine to underscore how ill-conceived our energy policy was, unduly exposing our economies to an autocratic regime. With this last, untimely decision that imposes the imminent electrification in the car industry, we are creating similar conditions, albeit substituting one regime for another, namely, China. Indeed, China is endowed with lithium and most of the minerals required for producing batteries.

The outcome of this ideological, ill-conceived strategy is that EU households will end up paying a double tax: higher prices when they purchase goods and services, including new cars, as well as higher interest rates on their loans and mortgages.