First of all, this is because, in Spain, energy, and electricity in particular, account for a larger share of the consumption basket. While Spanish households devote 11.7% of their budget to energy, the euro area average is 10.9%. Regulatory and pricesetting mechanisms are another factor responsible for the notable unevenness across euro area countries in the pass-through to retail prices of the higher wholesale electricity price. For instance, in Spain around 40% of households opt for a dynamic pricing system, characterised by the high frequency of price revision, which explains the higher volatility of the electricity component of inflation and, thus, the faster and stronger pass-through. 8  The rising inflation is also having an uneven impact on households and firms. In particular, in recent months, lower-income households have experienced higher inflation because staple goods, whose prices have shown a greater relative increase in recent times, account for a larger share of these households’ spending. Consumer price inflation dynamics have gradually spread across the board since the summer of 2021. Thus, underlying inflation has risen rapidly, exceeding 4% in mid-2021 in the United States and 2% since end-2021 in the euro area. The underlying inflation rate has continued to increase and in April reached a level of 3.5% in the euro area (the highest in the history of the monetary union) and 3.4% in Spain (the highest since 2003). Additionally, according to the preliminary estimates available, underlying inflation in the euro area climbed to 3.8% in May.
6 And, such an approach would require binding agreements amongst home and host resolution authorities. Vague assurances would not do the trick, as domestic authorities could change their minds when it really mattered. Host and home authorities would need “skin in the game” to underpin co-operation. And co-operation in distressed circumstances could helpfully flow back to how supervisors work together in peacetime. An obstacle to such an approach might be that in some countries, legislation mandates preferential treatment of creditors and depositors of local entities of cross-border banks. But that might be weighed by legislatures against the current reality that when the fiscal authority finds itself injecting equity to save a bank and preserve stability, it protects worldwide creditors not just its home creditors. To be clear, I am not advocating any particular approach here. I just want the authorities to articulate the issues clearly, so that our leaders can make a choice and think through the consequences of that choice. I’m not sure that it has really been put to them up to now. And, of course, whatever is done, within Europe we would need to find an EU version that sat between national and global regimes. Summary My purpose today is not to advocate solutions. It is to identify the big issues and to float some possible avenues for discussion in the EU and internationally. The big question is clear enough. Can we resolve distressed LCFIs in an orderly way without injecting public money?