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November 20, 2024 - 1:00pm
The European Central Bank (ECB) released inflation numbers for the Eurozone that showed inflation falling back to the central bank’s target of 2%. But the headline number covers up an awful lot of divergence between European countries. These differences could be extremely problematic because they will undermine the basis of having a single monetary policy in the first place.
Slovenia, Ireland, and Lithuania saw annual inflation rates of 0-0.1%, meaning that these countries risk slipping into deflation and, from there, into recession. Meanwhile, Romania, Belgium and Estonia had inflation rates of 4.5-5%, which are far above the 2% target.
One key challenge in the Eurozone has always been to harmonise inflation rates. If inflation rates differ a great deal between countries, a single monetary policy ceases to make sense. The recent bout of inflation appears to have done deep structural damage to the project of harmonisation. But the European economic discourse has become so tired and dilapidated that such problems, which were once hotly debated, are barely mentioned anymore.
European policymakers and economists seem wholly focused on external crises of various sorts — Covid-19, the Ukraine war and now a second Trump presidency — and so seem completely unable to field the sort of discussions needed to maintain dynamism in Europe. In a speech in July, former President of the European Central Bank (ECB) Mario Draghi admitted that the single currency is a political project with a questionable economic underpinning.
“The key question was not whether the euro area was an optimal currency area from the start — evidently it was not — but whether European countries were prepared to make it converge towards one over time,” Draghi said. “I can attest that the political motivation was real.” Such an admission would have been unthinkable only a few years ago because it would have provoked European anti-federalists to push back against those who want to centralise the European project. Such concerns are no longer raised.
When it comes to Trump’s tariffs, the consensus appears to be that they will damage growth rather than give rise to more inflation. At least this is what ECB Vice President Luis de Guindos and Bundesbank President Joachim Nagel told reporters. This is likely an accurate assessment, but only if the tariffs are imposed on Europe by America. If America also ramps up pressure on Europe to enact tariffs on China, the result could well be inflationary.
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SubscribeWritten apparently without any sense of irony:
“and so seem completely unable to field the sort of discussions needed to maintain dynamism in Europe”
Maintain ? Where is this dynamism in Europe ? In precisely what areas are we advancing faster than the US or Asia ?
We’ll be reading much the same article in 4 years time. Not even Trump will knock reality into the skulls of the EU elite.