We have since seen how the predicted worsening of the situation for peripheral countries has indeed come to pass.
As of today we have 150,000 more reasons to protest at the damage being inflicted on the euro area by its central bank. Eurostat has just published the latest unemployment numbers. Between April and July unemployment in the euro area rose by c. 150,000 (from 15.6 to 15.75 million). In other words the 17 member countries have in three months given up almost one third of the gains achieved in terms of reducing unemployment since the middle of last year. (The numbers are seasonally adjusted, so the loss does not reflect seasonal factors.)
We know that monetary policy works with the famous ‘long and variable lags’. I am not suggesting the two hikes caused the rise in unemployment. The fact remains that two decisions to hike rates were taken in an environment in which an already disastrous labour market situation was getting worse instead of better, headline inflation was declining and core inflation below target and policymakers are desperately trying to consolidate public finances.
The euro area needed and needs interest rate hikes like a hole in the head. The euro area needs a central bank that is committed to supporting the agreed priority policy goals of the euro area and its member countries: getting back to growth, reducing unemployment, bringing government debt levels down. It is mandated to do so given the lack of any (upward) threat to price stability. It does not have such a central bank at present.