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Tuesday, June 25, 2024

Inflation and public debt

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Concerns expressed by the ECB concern the over-indebted southern Europe, which will face serious issues from a sharp withdrawal of quantitative easing and the negative impact of restricting market liquidity at a time when the economy is facing significant challenges. concerns the growth rate.

The confrontation between northern and southern Europe is emerging once again, as is the case with the discussions on setting up support mechanisms. Possibly the only exception was the joint measures taken by Europe to combat the negative effects of the spread of the virus with the European Commission jointly exiting the markets to raise funds to support the economies of the Member States. Of course, this discussion also ended after the provision of specific guarantees to the northern countries.

Increase in yields

In recent weeks there has been an increase in government bond yields with issuers in southern Europe such as Italy, Greece, Portugal and Spain. These countries have high lending rates, which worries investors, while the emerging intention of central banks to withdraw quantitative easing programs and raise interest rates is driving government bond yields up.

At the same time, markets are anticipating events and rising borrowing costs show that investors are less optimistic about the course of the economy. After all, almost all the countries of the European Union, including the Cypriot Ministry of Finance, have significantly reduced their estimates for the growth rate of their economies in 2022.

It should also be noted that the support of the economic units during the coronary restrictive measures was through the increase of the public debt (in contrast to the Reconstruction Fund, which is essentially mostly benefits), so the countries emerging from the virus crisis continue to face recessionary pressures due to the unfavorable and challenging international economic and political environment.

It is noted that for every state, business and household access to cheap loans is an important tool in finance and deficit coverage in times of deficit.

The course of public debt is a particularly important indicator for the economy as it demonstrates the “resistance” it has in case of negative developments. It is understood that high lending/leverage rates, as for businesses, affect the state's ability to implement its fiscal policy but also to make drastic decisions in times of recession.


The prolonged period of inflationary pressures, which is intensified by geopolitical tensions, causes uncertainty with investors and households to make second thoughts in relation to investments or capital expenditures, postponing them for the member. This, combined with the reduction of household purchasing power and the reduction of consumption, have a negative effect on the recovery of economies.

The withdrawal of the measures from the central banks is a return to normalcy, provided that this withdrawal will be done gradually so as not to negatively affect economies and citizens to a large extent. This becomes particularly acute given that the increased health and productivity expenditures of the economies, including employment, have been financed by increasing public debt.

Governments and international organizations are called upon to manage the phenomenon of high inflation rates, as long as it is clear that the phenomenon will last and intensify. It is well known that if not managed properly, it will create obstacles in the first phase of the recovery process after the virus crisis and in a new crisis if things go derailed.

The ECB Council is called upon to balance its inflation and concerns about a slowdown in the European and global economy in general following developments in Ukraine and economic sanctions imposed on Russia. Many analysts say that the inflow of liquidity from central banks was uncontrollable and untargeted, with the result that they, and especially the ECB, appear trapped.

Source: politis.com.cy

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