In Europe, this is a greater threat than the coronavirus epidemic

In Europe, this is a greater threat than the coronavirus epidemic
In Europe, this is a greater threat than the coronavirus epidemic

Summarizing the views, the UK Economic Daily found that more than a third of those surveyed identified inflation as another key risk to COVID that could outweigh the economic growth outlook.

“Inflation will bite out of wages, reducing potential purchasing power, and the European Central Bank will eventually be forced to raise interest rates, which will also curb growth,” he quoted Jesper Rangvid, a professor at Copenhagen Business College, as saying. – the British business paper.

Several suggested that the ECB would have to stop buying Member States’ bonds once and for all, for which concrete preparations had already been made: the EU’s central bank in Frankfurt had already indicated in early December that € 1.85 trillion in COVID’s economic damage its bond purchase program will be phased out from next March.

This year, the EU’s twenty-week inflation rate jumped to 4.1 per cent year-on-year, which is unprecedented in ten years, and the November consumer price index was already 4.9 per cent. (In the days before the epidemic, inflation was so low that even the threat of persistent deflation was discussed as a real risk factor in economic circles at the time.)

According to experts, the rapid rise in prices is particularly affecting young people who are lagging behind, as well as young people who do not yet have significant savings but are forced to pay extra costs due to starting a family.

The fact of the price increase alone did not surprise anyone. In the wake of the resumption of epidemics, large amounts of government money have been pumped into economies everywhere, at both Community and nation-state levels, made possible by the fact that the fiscal rules and limits of the Community Stability Pact have been suspended for several years at EU level. (currently scheduled for the end of 2022). One of these limits is the limit on the possible level of inflation in the Member States, which, however, is also repealed for the time being.

As a result, inflation started to pick up during the year, but this was described as a temporary phenomenon in various professional and political forums for months. The recurring argument throughout was that the current inflation was one-off and extraordinary, so Christine Lagarde, the President of the European Central Bank, even spoke in early November that the ECB was “unlikely” to raise interest rates in the foreseeable future.

In political circles, however, there has long been a growing concern. As one autumn analysis by Politico noted:

professional politicians are well aware that the deterioration of direct livelihoods can soon provoke mobilizing popular anger,

which current governments rarely go through without injury.

Incidentally, according to Bloomberg, this approach is now appearing on the Governing Council of the ECB, when it begins to say so. there is a rift between the optimistic approach advocated by Lagarde and the more intrusive party position of the ‘worried’.

This was also confirmed in a recent summary by the Financial Times, mentioning that the central bank in Frankfurt was also visibly “surprised” by the persistence and continued upward trend in eurozone inflation. As a result, the ECB has already adjusted its headline inflation outlook to 2.6 per cent this year and estimated it at 3.2 per cent next year – both well above the 2 per cent threshold set by the Treaty.

Katharina Utermöhl, chief economist at Europe at Allianz, said in a survey of the British newspaper that if this continues, “The European Central Bank will be forced to intervene more brutally than planned, which will inevitably put a strain on economic developments, and ultimately challenge financial stability ”.

Apparently, ECB circles continue to build on that

the economic reopening of 2021 has not only brought about a surge in producer and consumer consumption (and thus a rise in prices), but also an unprecedented economic spark.

Based on data to date, Frankfurt estimates that economic growth could reach 5.1 percent this year, the highest in decades. Similarly, employment data is improving, with the unemployment rate in the euro area, which was predicted by 10 per cent by economic workshops at the beginning of the year, now falling to 7.3 per cent before the epidemic. The most critical factor is considered by many to be the sustained rise in energy prices. In this regard, the Financial Times pointed out that the rise in producer prices in October was 21.9 percent, which is higher than at any time in the two-decade history of the euro. And nearly two-thirds of that – 62.5 per cent – came from rising energy prices, according to the British paper. In light of all this, Nicholas Bennenbroek, an economist at Wells Fargo, echoed the views of many in the survey that

runaway inflation is a more serious risk factor (for economic processes) than an epidemic.

The negative economic repercussions of COVID-19 so far have been “typically short-lived,” but the current pattern suggests that the weakening effects on economic growth may be long-lasting, he pointed out.

Cover page: The European Central Bank’s Frankfurt headquarters on the banks of the Main on 16 December 2021. Source: MTI / EPA / Ronald Wittek

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