Europe faces double difficulties

The European Union (EU)’s economy is at risk of falling into a pincer movement as inflation is running hot but the growth is stagnant. The bloc's policymakers are facing the difficult problem of how to calm the price storm without hindering the economic recovery after the COVID-19 pandemic.

A shopper pays with a Euro bank note in a market in Nice, France. (Photo: Reuters)
A shopper pays with a Euro bank note in a market in Nice, France. (Photo: Reuters)

The inflation of EU members hit a new record in March. According to preliminary data from Eurostat, Euro annual inflation is expected to be 7.5 per cent in March 2022, breaking the record of 5.9 % in February. It was the fifth straight month that Eurozone inflation set unexpected records and it was the highest level since 1997. The inflation is especially severe, even reaching double digits, in some member countries such as Lithuania (15.6 per cent), Estonia (14.8 per cent) and the Netherlands (11.9 per cent). Germany's inflation hit a staggering 7.6 per cent.

Hyperinflation is no longer a new story for EU member states, especially in the context of rapidly increased energy prices over recent months. Energy prices in March increased by 44.7 per cent over the same period in 2021.

However, the worrying thing is that although soaring energy prices are the main cause of high inflation, inflation has overshadowed many other commodities. Food, alcohol and tobacco costs rose 5 per cent, while prices for goods like clothing, cars, computers and books increased by 3.4 per cent.

Economic experts said that all prices have increased rapidly on a large scale, not just energy. Therefore, the “price storm” in the EU is likely to continue for a long time, be more severe than expected and be unlikely to change soon.

President of the European Central Bank (ECB) Christine Lagarde noted that the main factors causing the increase of EU inflation in the coming time, are that electricity and food prices continue to climb and the supply chain bottleneck has not been removed.

However, galloping inflation is not the only danger the EU economy is facing as the economic growth rate has not been as expected. The EU Commissioner for Economy Paolo Gentiloni recently affirmed that the Russia-Ukraine conflict will make the Eurozone “economic ship” more sluggish. Despite affirming that there was no prospect of a recession, he said the bloc’s existing growth forecast of 4 per cent, which was issued shortly before the tensions between Russia and Ukraine, need to be revised downward.

Sharing the same view with Gentiloni, ECB President Christine Lagarde stressed that the Russia-Ukraine crisis has slowed the post-pandemic recovery.

According to analysts, the current economic climate could make European consumers more pessimistic and cut daily costs. A decrease in consumer spending will hurt the economy as businesses sell fewer goods, leading to shortfalls in employee wages and delayed investment projects.

According to the ECB, the Eurozone economy grew positively but at a low rate in the first quarter of 2022, while the growth in the second quarter is forecast to be almost zero. Germany, the EU's largest economy, is one of the members recording many bleak prospects.

The slow economic growth and increasing inflation can put the EU in a pincer movement, pushing the ECB into a "dilemma". On the one hand, if the ECB tightens monetary policy to bring inflation back to 2 per cent, the post-pandemic economic recovery may be halted.

Moreover, the cause of high inflation in the EU today mainly came from external factors, so the ECB's inflation control tools may not be effective. On the contrary, if the ECB loosens monetary policy to boost economic growth, it will make inflation hotter. However, in reality, the ECB is keeping the interest rate at a historic low. Therefore, there is not much room for further loosening monetary policy.

Europe is facing many difficulties such as cooling down the galloping inflation while finding a solution to the problem of economic recovery. Perhaps it has been a long time since EU leaders have found themselves in this “dilemma”.