This week we have heard two bad news: the war in Ukraine will last for a long time and so will the rise in interest rates and, therefore, the damage to the economy will be greater.
On the military front, Putin is not going to give up until he achieves his objectives or leaves with his feet first. The pressure of the hard wing forces him to escalate the conflict. Note that the recruitment of 300,000 civilians is more than begging human resources until now, which were 200,000 soldiers.
As for tactical nuclear weapons, there are many doubts that they will be used in large cities like kyiv, given the proximity of the Russian border. The scope of the nuclear explosion is difficult to control, as seen in Chernobyl, before it will test with chemical or biological weapons.
Regarding the economic consequences, they are worse every day. The central banks of Europe and the US were wrong in their perception of the conflict. They believed that inflation was going to be temporary and now they have to overreact to control it, which carries the risk of causing a great recession.
The seriousness of the situation is made known in small doses. Federal Reserve Chairman Jerome Powell was the first to crack open the melon of surprises at the Jackson Hole summit in late August. Powell recognized that the rise in prices was far from being resolved and the Fed would apply to it without palliatives.
On Wednesday, the interest rate rose for the third consecutive time by seventy-five basic points and it is expected that this movement will be repeated in the first week of October. The Fed revised its forecasts, the year will end with rates at 4.4%, more than one point above the current level.
The worst is not this exercise. Until now the market expected a rapid tightening of monetary policy in 2022, followed by an easing in the next, which pointed to a short crisis.
The Fed Open Committee forecast this week, however, that rates will only drop half a point in 2023 (to 3.9%) and an additional point in 2024 (2.9%). In other words, we will have rates above 3% until the end of 2024. And that is assuming that the forecast does not worsen.
What will happen in Europe? In the ECB it is also managed internally that rates will remain high for a couple of years, the same date as the Fed, and will reach 4% in 2024. It is difficult to make accurate forecasts without knowing how the war or chains of supply, but all the data points to two years of high rates at least.
The next question is if we are going to recession and for how long. At the moment, the two big central banks avoid the cursed word, recession, so as not to alarm. To avoid making a statement, the ECB conditioned it on Putin completely cutting off the gas supply, which we all take for granted.
The Federal Reserve uses annual forecasts to get around it. It reduced American growth to just two tenths for this year and left it at just over one point next year. But who is capable of specifying with a margin of only two tenths the economic behavior in 2022? In addition, although it does not give clues about the inter-quarterly rates, a recession is entered in the year with two negative quarters.
In short, central banks use dialectical juggling to hide the picture ahead. In the best of cases, there will be a stagnation with high prices, what is called stagflation, with significant losses in purchasing power and social conflicts in the making.
And in Spain, how are we going to face the next two complicated years? It is unknown if anyone is thinking of a serious anti-crisis plan. On the contrary, the latest measure announced by the Minister of Finance, María Jesús Montero, is a tax hike, just what any basic manual to fight against the slowdown advises against. Economic policy has been moving in the opposite direction for some time.
Populist measures such as subsidizing a liter of gasoline or public transport create a feeling of temporary relief in the pockets of citizens, but they do not reduce inflation and increase spending. There is a lack of an economic policy aimed at small and medium-sized companies and the self-employed or at redirecting this general aid to the most vulnerable classes, as recommended by the IMF to the OECD.
The clear proof of the failure of the Government is that Spain has the highest rate of inflation of the large EU countries, with more than 10%. To cover it up, Sánchez and his acolyte ministers have designed a strategy of blaming the big companies first and then the rich, when the collection of the entire Wealth Tax represents a sum of less than 2,000 million, which would not serve to alleviate to the citizens.
The Andalusian president, Juanma Moreno, removed the fuse from regional financing by announcing the abolition of the Wealth Tax. But it was a bomb about to explode, because Sánchez has done nothing but raise taxes, with the exception of energy taxes, since the war broke out. He should have reduced them, as the five autonomies of the PP have done. We are the developed country that most increased fiscal pressure in the legislature, according to the OECD.
Patrimony is an obsolete tribute that does not exist in the rest of the European Union and, therefore, Moreno Bonilla and Ayuso do well to suppress it. The rest of the autonomies should remove it as soon as they can, as announced by the Murcian, Fernando López Miras. Even the Catalan president, Pere Aragonés, is willing to withdraw Patrimony in exchange for receiving compensation from the State.
The Treasury should undertake the reform of regional financing, pending for more than five years and which was postponed to the next legislature. But do not curtail the fiscal powers of the autonomies.
Regional governments must be left a margin for managing personal income tax, as is done in Europe and included in the Constitution. Would the finance minister allow Brussels to harmonize all European taxes? Well, Montero calls it harmonizing, but he means recentralizing, as Escrivá recognized in Onda Cero.
The great beneficiary of inflation is not the big companies or the entrepreneurs, who see their margins reduced, but the Government. Tax collection will increase by around 55,000 million this year, in light of the data for the first semester, to which should be added between 8,000 and 10,000 million that will be saved by not deflating the personal income tax rate.
As Sánchez evaluated the extra money destined for the energy crisis at 30,000 million, including the VAT cut on electricity and gas, there are between 15,000 and 25,000 million left (if we count the non-updating of the IRPF rate), which the Executive could used to reduce taxes on the self-employed and SMEs in difficulty or on citizens with lower incomes, as announced by Galicia or Murcia. Such a policy would benefit “middle and working classes”, as Sánchez promises.
The middle classes and the workers are going to be the great pagans of this crisis, let no one doubt it, because by attacking the big companies and the businessmen, the only thing that will be achieved is to retract investment and job creation. Unemployment rose brutally in the last two months, despite the fact that it was presumed that I contracted it.
The economic drain will continue in the coming months without a plan to prevent it. The current policy fosters legal insecurity, raises a barrier to domestic and foreign investment, and is openly contractive. The 25,000 million that the Treasury pockets more due to inflation should be used to boost the economy.
Vice President Nadia Calviño, in a gesture of fiscal orthodoxy, prefers to allocate it to reduce the deficit and public debt. She is respectable, but then they should not blame the businessmen for the hardships of the population in a populist discourse.
To make matters worse, Montero, in his double role as head of the Treasury and deputy secretary general of the Socialists, will use the Budgets as a fiscal weapon to attract the support of Podemos (in irreversible decomposition) and its partners from ERC or Bildu.
As the Budgets do not allow the introduction of new taxes, only the reform of existing ones, he plans to raise the taxes on capital income, which Zapatero reduced, and give another twist to those who earn the most through personal income tax in the name of a non-existent tax justice. A hoax, which will deepen the crisis and hit the middle and working class.
PS.- The employer’s president, Antonio Garamendi, hopes to be re-elected by acclamation as head of the CEOE at the end of November. But there is a growing discontent among businessmen, who do not feel well defended from the constant attacks of the Executive, or after the signing of agreements such as the labor reform.
Everyone is waiting to see if someone takes the step and shows up, after Garamendi did not get the unanimous support of his vice presidents. Most are too busy solving the problems of their companies, although the uncertainty will remain until the first week of November, which is the deadline for applications.