​There is also an erosion of public trust in central banks, according to the 10th edition of the Euro Monitor published on Monday, the latest survey by the Edelman Barometer Trust, which for the first time indicates a change in their perception. In the USA and Germany (two of the five largest economies in the world), central banks have a confidence level below 50%.

Bank of England (BoE May 2022) estimates show growing public skepticism about national banks’ ability to tame inflation.

Trust is a key factor in supporting long-term economic growth, and the Fed’s victory in the war on inflation in the 1980s under Paul Volcker was a milestone in building the central bank’s brand and the public’s favorable perception of these institutions’ ability to act accordingly to ensure price stability.

Recession, stagflation or a combination of both?

There is a growing view that there are risks of a major recession (Nouriel Roubini), stagflation (Charles Goodhart), or, as Larry Summers points out, a new combination of stagflation and age-related stagnation. Age stagnation refers to little or no economic growth over a long period of time and is a concept attributed to Alvin Hansen.

Summers says central banks have been slow to respond to an unprecedented wave of inflation, and swift and decisive action is now needed, including a review of the narrative and an end to the focus on expectations amid uncertainty.

After the last meeting of the Federal Reserve’s Monetary Policy Committee (FOMC) on July 27, Jerome Powell announced the de facto withdrawal from forecast guidance. This was done by ECB President Christine Lagarde at a press conference after the decision to increase the interest rate by 50 basis points on July 21. Moreover, despite the actions of governments to mitigate the social impact of rising prices through compensation schemes or caps, the danger of a spiral between wages and prices is real.

We are in a rare place of confluence of geopolitical, economic and technological forces that have serious implications

Analysts are now pointing to a rare confluence of geopolitical, economic and technological forces with serious long-term consequences. Upheavals caused by geopolitical displacement, disruption of economic flows, instability of energy, food and financial markets are likely to shake social and political structures in some states, weakening the capacity of global mobilization to confront long-term challenges such as climate change or demographic decline.

BIS experts are in favor of consistent tightening of monetary policy to avoid entering a period of sustained high inflation, when non-monetary factors may become dominant. BIS Director General Agustin Carstens says “decisive action” is needed given the “potential change in inflation dynamics” and the calibration of the appropriate monetary response is heavily marked by uncertainty.

He pointed to intense public concern about rising prices – they cause inflationary inertia, impose a more aggressive approach to monetary policy and indirectly higher costs, including high unemployment: “It is important to try to see how we can sustain economic growth. .regardless of fiscal or monetary policy. Therefore, we again call for important structural reforms,” ​​says Carstens. In this context, many central banks are from large economies such as Canada, South Africa, Ukraine, India, Saudi Arabia, Brazil, Mexico or Australia, as well as developing banks from Africa, Latin America, the Balkans, the Middle East or Central Asia and from the south – strengthens the monetary policy, pressing hard on the pedal of key interest rates.

Falling behind this trend can lead to capital flight and currency depreciation.

Are we switching to the euro?

Joining the Eurozone remains a political decision, but the main challenge is the same as before the pandemic: the candidate country’s ability to prevent macroeconomic and financial vulnerabilities and to have a sustainable capacity to absorb macroeconomic shocks and imbalances.

The introduction of the euro is estimated to cost Croatian local banks around 1 billion kunas (about 133 million euros) per year in conversion fees, as well as 80 to 100 million euros in costs needed to adapt IT services and ATM networks. Croatian Association of Banks (2022). Findings presented by the ECB and the EC in the Convergence Reports (EC, 2022d), published on 1 June this year, assessing the progress made by Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden, the seven member states outside the euro area , which have legally committed to adopt the euro currency – are fully converging: (i) only Croatia and Sweden meet the criterion of price stability; (ii) all Member States meet the criteria for public finances, with the exception of Romania, which is the only Member State applying the Excessive Deficit Procedure (PDE); (iii) Bulgaria and Croatia meet the exchange rate criterion; (iv) Bulgaria, Croatia, the Czech Republic and Sweden meet the long-term interest rate criterion; (v) Croatia meets the four nominal convergence criteria and its legislation fully complies with the requirements of the TFEU.

While the Bulgarian authorities reiterate the goal of joining the eurozone in 2024, in other member states outside the eurozone – Poland, the Czech Republic, Hungary – the path to a single European currency does not seem to be a priority this year. In this situation, much attention was focused on resolving the energy crisis and the socio-economic consequences of the war in Ukraine, as well as on efforts to curb inflation and avoid a serious recession.

Joining the euro zone is a priority for Romania and meets consensus in the political class. But large deficits, the fragility of the external balance are the main obstacles to entering the MCS2 in the near future, and then to joining the euro zone.

In the absence of sustainable fiscal consolidation, it is unrealistic to expect rapid accession, the report said.