Brussels, Jan. 18 (BNA): Eurozone financial officials on Monday risked a high-level political equilibrium driven by conflicting economic forces: weaker growth expectations and stronger inflation.
Finance ministers from the 19 countries that share the euro have pledged to continue budget stimulus for the European economy amid headwinds from the highly transmissible omicron variable.
At the same time, they sought to reassure voters by pledging to be vigilant about sharp price increases, the Associated Press (AP) reported.
Am I worried about inflation? It is clear that, Dutch Finance Minister Sigrid Kaag told reporters in Brussels where she attended a meeting with her eurozone counterparts. “The purchasing power of individual citizens will be affected.”
The eurozone is facing a slowdown in economic growth this year after a strong recovery in 2021 from a severe recession caused by the coronavirus two years ago. But rising inflation, which hit a record 5% in December and is linked to energy market pressures, has complicated the picture – for both policymakers and voters.
Ioana Orfano, a small producer of olives and pomegranates along the east coast of Greece, said the prices she pays for fertilizers and pesticides jumped to alarmingly high levels in the second half of last year.
“This trend is very worrying,” Orfano told The Associated Press. “It’s hard for small farmers to keep operating because we have limited space to pass on cost increases to regular consumers.”
Such sentiment has helped raise questions about the European Central Bank’s policy of keeping the euro zone money supply loose to support economic activity.
The Frankfurt-based European Central Bank provided support in two main ways: keeping interest rates at zero or lower and helping to keep other borrowing costs in the market low by buying hundreds of billions of euros in assets in financial markets.
Daniel Gross, a board member of the CEPS think-tank in Brussels, said the European Central Bank must now act in a delicate manner by ending the pandemic-induced asset purchases while maintaining interest rates at current ultra-low levels.
“The economic emergency caused by the coronavirus is over and there is a risk, though likely minimal, that eurozone inflation will remain too high for much longer,” Gross said by phone.
Eurozone GDP is expected to expand by 4.3% in 2022 after an estimated 5% growth last year and a 6.4% contraction in 2020.
However, the projected growth is above expectations with a maximum of 4% expansion in gross domestic product this year in the US, as the central bank warned of the economic threats to inflation and indicated an imminent tightening of monetary policy.
By contrast, European Central Bank officials, including President Christine Lagarde, have indicated they are in no hurry to raise interest rates, arguing that eurozone inflation will fall back to the bank’s 2% target in time.
The European Commission, the executive arm of the European Union, has forecast a further slowdown in economic growth in the eurozone in 2023 to 2.4%.
“We remain well aware of the risks and challenges that lie ahead,” Irish Finance Minister Paschal Donohue, who chairs the group of eurozone finance ministers, said at a news conference after Monday’s meeting.
While growth prospects are weaker, national governments in Europe are pressing ahead with plans to spend hundreds of billions of euros in unprecedented EU funds raised to help weather the recession caused by the pandemic.
In parallel, some countries, including France, are pushing for looser EU restrictions on national debt to allow more room for growth-enhancing public investment. This will require concessions from Germany, the traditional advocate of budget austerity.
“Europe needs more prosperity,” French Finance Minister Bruno Le Maire told reporters. “More growth is needed.”
In this context, employment trends in Europe could play a key role for policy makers in the coming months because a tighter labor market could lead to wage increases, and thus stronger inflation.
So far, the EU Commission has pointed to the continuing stagnation in European labor markets and has forecast 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 Orfano offered a potential warning on this front, saying she faced demands from seasonal workers for higher wages.
“They pointed to high inflation and took advantage of the sudden supply shortage of such workers in Greece,” Orfano said.
MI