Dorothea Siems, German chief economist, put the eurozone on alert as she said it was a “decisive week” for the euro. She predicted the European Central Bank (ECB) would “finally become Europe’s bad bank” as she likened the euro to the embattled Turkish currency.
The ECB is set to discuss whether to raise interest rates by 25 or 50 points at a meeting on Thursday to tame record-high inflation.
Writing for Welt, Ms Siems said: “The ECB is preparing an interest rate turnaround.
“But instead of fighting inflation with all its might, a new instrument is to help debt sinners. The ECB would thus finally become Europe’s bad bank for all junk bonds – and no objections are heard from Germany.
“This is a decisive week for the euro.”
Her comments come after sources said the ECB is considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation.
To cushion the impact of the higher borrowing costs, officials are also expected to announce a deal to help indebted countries like Italy on the bond market.
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That dynamic creates a balancing act for the ECB, between raising rates to curb price growth and ensuring that the most indebted of the euro zone’s 19 member countries don’t run into financial trouble as a result.
Other major central banks have been raising rates in bigger increments, such as 75 or even 100 basis points, raising the pressure on the ECB to do more.
But Ms Siems argued a “bad example” was “setting a precedent”.
She said: “Where is the outcry of the governments in the more solid states against this threatening breach of contract?
“The fact that German Chancellor Olaf Scholz recently declared at his citizens’ meeting in Lübeck that inflation ‘will remain a problem for a long time to come’ can certainly be seen as support for Lagarde.
“In any case, the German head of government is not pushing for the ECB to finally take a full-on stance against rising prices. It fits in with this that SPD leader Saskia Esken is demanding that Germany should also suspend the debt brake in 2023.
“In the monetary union, the bad example is setting a precedent. That’s why the euro is turning into the lira.”
The euro jumped on Tuesday following reports a 50 bp hike was under discussion, and was last up 0.9 percent against the dollar at $1.0232 after the single currency briefly fell below parity last week.
The news comes after the ECB said it would raise interest rates gradually, probably by 25 basis points in July with a bigger move possible in September following a meeting in June.
But ECB chief Christine Lagarde later said there were “clearly conditions in which gradualism would not be appropriate”.
Eurozone inflation hit 8.6 percent last month and is expected to keep rising until the autumn, driven by soaring fuel and food prices.
It is then seen slowly falling back but could hold above the ECB’s 2 percent target through 2024, raising the risk that wages will follow, setting off a hard-to-break wage-price spiral.
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