Debate over eurozone monetary policy could soon become more intense. Inflation at 10.7% in October hides large disparities among member states. Prices are rising by 7% per year in France, 12% in Germany and 22% in Estonia. EKT’s policy of raising interest rates risks being too aggressive for some countries and timid for others.

During the pandemic, prices have declined depending on countries’ containment policies, vaccination levels, and levels of government support. Then, as the economy began to recover, prices rose faster in the hardest-hit countries. The energy shock worsened after the war in Ukraine, and the problem was exacerbated by differences in the energy mix and consumption patterns. Retail energy prices in the euro area rose by 40% between August 2021 and August 2022.

But energy ranges from 6.7% of the price index in Malta to 16.2% in Latvia, according to the OECD. The disparity in core inflation excluding energy and food has also widened over the past two years, from 4% in France to over 14% in Slovakia.

The Monetary Union Treaty forces the ECB to take a unified approach. For now, its officials agree to quickly raise the key interest rate until it reaches a “neutral” level that neither stimulates nor constrains the economy. This level is estimated by some central bankers at almost 2%, which could be achieved by the end of 2022.

However, further rate hikes may be needed if inflation persists. That’s when the old debate in the ECB’s governing board between the hawks from the north and the doves from the south could become heated, as in the case of the 2011 debt crisis. Lower-inflation countries, led by France, will argue that the ECB should stop. Those with higher inflation will want to keep it going until the index slows down. As usual, hawks come from countries such as Germany and the Netherlands, where prices rise the fastest.

However, according to most forecasts, the eurozone economy will be stable next year at best. Thus, a further increase in rates could cause political upheaval and lead to serious divisions in the ECB’s board.