Euro countries seek a path between high inflation and low growth

Eurogroup finance chiefs are engaged in a political balancing act driven by conflicting economic forces: weaker growth prospects and higher inflation

BRUSSELS — Euro finance chiefs engaged in an exercise in political balancing act driven by clashing economic forces on Monday: weaker growth prospects and higher inflation.

Finance ministers from the 19 countries that share the common euro currency have pledged to continue the fiscal stimulus of the European economy amid headwinds caused by the highly transmissible variant of the omicron. At the same time, they sought to reassure voters by urging them to remain vigilant in the face of sharp price increases.

“Am I worried about inflation? Obviously yes,” Dutch Finance Minister Sigrid Kaag told reporters in Brussels before entering a meeting with her eurozone counterparts. “The purchasing power of individual citizens will be affected.”

The euro zone faces slowing economic growth this year after a strong recovery in 2021 from a severe coronavirus-induced recession two years ago. But soaring inflation, which hit a record 5% in December and is linked to a squeeze in the energy market, has complicated the situation for policymakers and voters alike.

Ioanna Orfanou, a small-scale producer of olives and pomegranates along the central eastern coast of Greece, said the prices she paid for fertilizers and insecticides rose to alarming levels in the second half of Last year.

“This trend is very worrying,” Orfanou told the AP. “It’s getting harder for small farmers to stay in business because we have limited flexibility to pass cost increases on to average consumers.”

Such sentiments have helped raise questions about the European Central Bank’s policy of keeping the euro zone’s money supply loose to fuel economic activity.

The Frankfurt-based ECB has offered support in two main ways: keeping interest rates at or below zero and helping to keep other market borrowing costs low by buying hundreds of billions of euros in assets in the financial markets.

Daniel Gros, a member of the board of the CEPS think tank in Brussels, said the ECB should now act in a nuanced way by ending pandemic-induced asset purchases while keeping interest rates at levels. current ultra-low.

“The economic emergency caused by the coronavirus is over and there is a danger, although probably small, that inflation in the euro zone will remain too high for longer,” Gros said Monday by telephone.

The European Commission forecasts the euro region’s gross domestic product to grow by 4.3% in 2022 after an estimated 5% growth last year and a contraction of 6.4% in 2020.

Still, forecast growth is ahead of projections of a maximum GDP expansion of 4% this year in the United States, where the central bank warned of economic threats of inflation and signaled an impending tightening of monetary policy. .

By contrast, ECB officials, including President Christine Lagarde, signaled they were in no rush to raise interest rates, saying eurozone inflation would return to the 2% target. from the bank in due time.

The European Commission has predicted a further slowdown in eurozone economic growth in 2023 to 2.4%.

As growth prospects dim, national governments in Europe are pushing ahead with plans to spend hundreds of billions of euros in unprecedented European funds raised to help overcome the crisis caused by the pandemic.

At the same time, some countries, including France, are pushing for looser European limits on national debt to allow more room for growth-boosting public investment. This will require concessions from Germany, a traditional advocate of fiscal austerity.

“More prosperity is needed for Europe,” French Finance Minister Bruno Le Maire said on his way to the euro rally. “More growth is needed.”

In this context, employment trends in Europe could play a key role for policymakers in the coming months, as a tighter labor market can lead to wage increases and, by extension, higher inflation.

So far, the Commission has cited the continued slowdown in European labor markets and predicts that the unemployment rate in the eurozone will fall to 7.5% in 2022, from 7.9% in each of the previous two years. .

But Greek farmer Orfanou has issued a potential warning on this front, saying she has also faced demands for higher wages from seasonal workers.

“They cited rising inflation and took advantage of a sudden shortage in the supply of these workers in Greece,” Orfanou said.

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