The European Central Bank's decision to raise its base rates by 25 points has drawn a lot of criticism. It justified it by the persistence of an inflation level above 3% in the euro zone, well above the 2% threshold that it has set itself as a target, in accordance with its status. But this inflation comes in a context of economic stagnation and not at a time when excess demand in Europe is at the origin of price increases.

A debate of the same intensity exists on the other side of the Atlantic, but in a completely different context. Inflation is much higher than in Europe, as is growth, but this does not prevent the President of the United States, in defiance of the institution's independence, from asking the Federal Reserve to lower its interest rates, to support economic activity and employment and reduce the public debt burden. The role of monetary policy and central banks is now at the heart of the economic debate.

Two theories have long been opposed. Keynes had advocated recovery through increased public spending to get a country out of recession and unemployment. Roosevelt had followed his advice to overcome the crisis of 1929. These methods were then widely followed in Europe after the war. But the emergence of high and persistent inflation had sparked criticism and given rise to another vision. Milton Friedman recommended ensuring price stability by acting on the evolution of the money supply through the action of central banks through the setting of interest rates.

The debate between these two theories marked the period in which today's economic and political leaders were trained. But the world has changed and this change has accelerated in recent years. The question posed today is whether the analyses and solutions put forward by Keynes and Friedman are still relevant with regard to the current objectives of growth and stability. The criticism of the ECB's decision illustrates the doubts raised by the ability of monetary policy and the instruments at its service to resolve the current imbalances.

The justification given for this rate hike focused on the inflationary consequences of the war in the Middle East at a time when price increases in the euro zone accelerated in May to reach 3.2% year-on-year and GDP contracted in the first quarter by 0.2% compared to the previous quarter. But this presentation illustrates the contradiction between the decision taken and its theoretical basis. It was not too strong domestic activity that put pressure on prices since growth was negative. In addition, the day after this decision and following the statements of the President of the United States according to which the principles of an agreement with Iran were acquired, the price of a barrel of oil fell back below $90.

This announcement is not a new thing since similar remarks have been made several dozen times without it being translated into reality. Iran has not confirmed them, but has not rejected them as on previous occasions, which is nevertheless a step forward. But the markets' reaction was unambiguous. Contrary to the ECB's analyses to justify its decision, the rise in energy prices is not a lasting phenomenon since it has just been noted that they would fall heavily in the event of an agreement.

The second contradiction in the ECB's presentation lies in the recognition that inflation has an external cause. However, the entire monetary theory is based on the fact that inflation results from an excess of domestic demand in relation to production capacity.  By raising rates, we curb this demand by increasing the cost of credit, which affects public and private investment and part of consumption when it is the subject of credit. This would restore the balance between supply and demand and thus price stability. However, so far, the main cause of inflation has been the rise in energy prices resulting from the war in the Middle East and its direct repercussions on household bills and indirectly through its transmission to production chains. So the rise in rates would slow down an already stagnant activity without any positive impact on prices.

Another weakness is that the consequences of the rise in energy prices are not the same for all countries, which will be affected overall by the tightening of monetary policy. The most affected country is Germany because of its own mistakes in its energy strategy. By giving up nuclear power and sourcing Russian gas and fossil fuels from the Middle East, the country has suffered a sharp rise in the prices of these energies but also of its electricity. France, on the other hand, has limited the inflationary consequences of the fuel war and has inflation that is significantly lower than that of its neighbour. Yet the country will suffer the same rise in interest rates.

This increase will also affect the burden of the various public debts of the countries of the euro zone. Here again, the consequences will be different since the levels of debt are very varied. France and Italy will be the countries most penalised, while Germany, which has a much lower debt ratio due to having spent much less on military spending for decades than France, will be less affected.

Finally, this rise in interest rates, which is not justified, as we have seen, by imbalances within Europe, comes at a time when the international environment requires a sharp increase in military spending to ensure the continent's security and when the wave of technological innovation requires a sharp increase in research and development spending on the part of companies and the State through its public institutions. The Frankfurt decision therefore runs counter to Europe's essential interests.

This would not be the first time that the ECB has made an error of assessment. In the spring of 2008, in the midst of the sub-prime crisis, it had already raised its rates. The causes of the crisis were perfectly identified and the failure of one or more financial institutions was foreseeable. It came a few months later with the bankruptcy of Lehmann Brothers in September 2008, giving the financial crisis a global dimension and provoking a deep recession.

The international environment is now uncertain. The failure of the talks between the United States and Iran will inevitably cause a rebound in oil prices, and no one can say how long oil prices will remain high. But no more than yesterday, the resulting price increases will have internal causes, and the increase in rates will not help to slow them down. Conversely, an agreement, and we have just had the beginnings of it, will very quickly result in a fall in fossil fuel prices and therefore in inflation since companies will gradually pass on the consequences to their customers. The rise in rates will have been useless. Let's hope that the ECB will then go back.

The ECB's mandate and operating methods were defined almost thirty years ago. But the world has changed. It is therefore necessary to adapt this essential European institution to today's world.