What are political implications of the ECB monetary austerity?

"Our worst foes are not belligerent circumstances but wavering spirits," she said, citing the early 20th century American author Helen Keller. "Faced with more persistent inflation, we cannot waver."

But further rate hikes are not without risks. It has already caused bank collapses. And by squeezing the money supply, job losses will increase, wages will decline, mortgages will become pricier, and investments in necessary climate policies will be hindered. What is more: a growing body of research shows that current inflation is driven by profits, not wages.

In the Financial Times (4 July), Andy Haldane, the former chief economist of the Bank of England, warned that today's "monetary austerity"-- like fiscal austerity in the 2010s — would mean "sacrificing many thousands of jobs for negligible benefit."

He also argued that central banks should allow inflation to be temporarily higher than the targeted two percent as there is "no evidence" this would impose extra costs on society.

Less resilient to 'known-unknowns'

In a June speech in Luxembourg, ECB chief economist Isabel Schnabel admitted the adverse side effects of monetary tightening, saying that "the path towards sustained price stability remains uncertain and fraught with risks."

She explained that a disinflationary policy also makes the system less resilient to outside shocks, which she described as "known unknowns."

Disruptions could emerge from a wide variety of sources. She highlighted El Niño, a band of warm water which scientists warn could push up global temperature above the 1.5 degrees Celsius threshold; a return of food price inflation and continued destabilisation caused by Russia's war in Ukraine.

She also mentioned the sometimes long persistent effects of crises. Sick leave is up across Europe since Covid-19, which Schnabel linked to possible mental health issues. Another is consistently lower investment compared with the pre-pandemic trend.

Belt-tightening increases these effects. But despite this and the "difficulties" in predicting how monetary policies might affect them, Schnabel argued that further tightening was necessary to "insure" against potential future inflation.

In a newsletter last week, financial historian Adam Tooze strongly criticised this conclusion, saying it was based on a "fog of uncertainty" and called for more public debate about the necessity of keeping inflation at two percent.

"Getting inflation down to two percent is a profoundly conservative political argument dressed in the garb of economic necessity," he wrote, arguing that the cost of living crisis could also be addressed with more welfare support. Writing about the UK specifically, he warned that years of austerity led to the "folly of Brexit."

Central bank independence, for the most part, insulates central bankers from democratic debate as their policies are solely aimed at restoring price stability and do not take into account political consequences.

There are tentative efforts to increase ECBs accountability through the monetary debates in the European Parliament, but these have so far not triggered broader societal debates about monetary decisions.

The rise of the far-right

But a rich history shows how monetary tightening has influenced the political outcome and, in some cases, fuelled reactionary political forces, even fascism.

In the book, The Capital Order, Clara Mattei, who is an assistant professor of economics at the New School for Social Research in New York, documented how interest-rate hikes and slashes in social expenditures helped solidify and pave the way to fascism in the 1920s — often with the help of centrist liberals.

Although fascism from a century ago cannot readily be equated with today's far-right parties winning anti-migration, anti-green electoral victories in Italy, Greece, Sweden, Austria, Germany and possibly Spain, the austerity policies are similar and it makes sense to be aware of the link between monetary tightening and reactionary politics.

Indeed Italy's far-right Giorgia Meloni has railed against ECB rate hikes which she described last week as "a hateful hidden tax that hits the poorest", even while she scrapped a minimum income scheme for the unemployed which lifted a million people out of poverty back home, and imposed a regressive flat tax.

A recent study on voting patterns found that the "main economic explanation" behind the populist vote in Europe is prolonged economic decline.

In Germany, for example, the far-right party Alternative For Germany (AFD) is riding high in opinion polls, on an anti-migrant agenda and blames the economic downturn on costly green policies.

The historian Katja Hoyer also recently linked the rise of the AFD and the popularity of their message to the "widespread sense of crisis" in the country, especially (but not exclusively) East Germany, where incomes are lower.

The sense of crisis is likely to become more intense once governments feel forced to cut costs and rate hikes that are meant to induce a recession and increase unemployment start to bite.