Thu | Jun 1, 2023

Euro nations seek path between high inflation, weak growth

Published:Tuesday | January 18, 2022 | 12:08 AM
Dutch Finance Minister Sigrid Kaag, second right, speaks with the media as she arrives for a meeting of eurogroup finance ministers at the European Council building in Brussels on Monday, January 17, 2022.
Dutch Finance Minister Sigrid Kaag, second right, speaks with the media as she arrives for a meeting of eurogroup finance ministers at the European Council building in Brussels on Monday, January 17, 2022.

Euro finance chiefs on Monday engaged in a high-wire political balancing act prompted by conflicting economic forces: a weaker growth outlook and stronger inflation.

Finance ministers from the 19 nations that share the common euro currency pledged continued budgetary stimulus for the European economy amid headwinds caused by the highly transmissible Omicron variant. At the same time, they sought to reassure voters by pledging vigilance over sharp price rises.

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

The eurozone faces a slowdown in economic growth this year after a solid recovery in 2021 from a severe coronavirus-induced recession two years ago. But surging inflation, which reached a record 5.0 per cent in December and is tied to an energy-market squeeze, has complicated the picture – for both policymakers and voters.

Ioanna Orfanou, a small-scale producer of olives and pomegranates along the central-eastern coast of Greece, said the prices that she pays for fertilisers and insecticides jumped to alarmingly high levels in the second half of last year.

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

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

The Frankfurt-based ECB has offered support in two key ways: maintaining its interest rates at zero or less and helping to keep other market borrowing costs low by purchasing hundreds of billions of euros of assets in financial markets.

Daniel Gros, a board member of the CEPS think tank in Brussels, said the European Central Bank should now act in a nuanced way by ending the pandemic-induced asset buying while holding its interest rates at the current ultra-low levels.

“The economic emergency caused by the coronavirus is over and there is a danger, albeit probably a small one, of euro-area inflation staying too high for longer,” Gros said Monday by phone.

The euro region’s gross domestic product is projected by the European Commission to expand 4.3 per cent in 2022 after estimated five per cent growth last year and a 6.4 per cent contraction in 2020.

Still, the predicted growth is higher than projections of a maximum 4 per cent GDP expansion this year in the United States, where the central bank has warned about the economic threats of inflation and signalled an imminent tightening of monetary policy.

By contrast, ECB officials, including President Christine Lagarde, have indicated that they are in no rush to raise interest rates, arguing that euro-area inflation will fall back to the bank’s 2.0 per cent target in due course.

The European Commission has predicted a further slowing of euro-area economic growth in 2023 to 2.4 per cent.

While the growth outlook is weaker, national governments in Europe are pressing ahead with plans to spend hundreds of billions of euros in unprecedented European Union funds raised to help overcome the pandemic-induced slump.

In parallel, some countries, including France, are pushing for looser EU limits on national debt to allow greater room for growth-boosting public investments. This will require concessions from Germany, a traditional defender of budget austerity.

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

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

So far, the Commission has cited persistent slack in European labour markets and predicted that the euro-area jobless rate will fall to 7.5 per cent in 2022 from 7.9 per cent in each of the previous two years.

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

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