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Falling inflation isn’t all good news for the Euro

Will the bloc's economic divergence threaten the entire project? Credit: Getty

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.

Would Europe go along with self-destructive anti-China tariffs? No one knows. The European elite appears to have convinced themselves that a Harris victory was inevitable and so they did not bother to plan for a Trump victory. Top EU officials only met in late October to establish the “Trump task force” once they realised that there was a real possibility of him winning. For this reason, it is difficult to say what European economic strategy will be for the next four years, and so the outcome will likely reflect which faction in Europe comes out on top. Ideally Europe would pave its own way and reset its geopolitical and economic relations to align with its own economic interests, but there are a lot of people in Europe opposed to this and its own interests are admittedly complicated by being the middle-man between the US and China.

The second Trump administration may shake the Europeans out of their complacency. But just as likely it’ll lead them to retreat deeper and deeper into fantasy internally, and dogma externally.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Peter B
Peter B
19 days ago

Written 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.

John Galt
John Galt
19 days ago

> Would Europe go along with self-destructive anti-China tariffs?

You know what else is self destructive shipping every single industry your continent leads in over to China while at the same time driving up the cost of energy by a massive amount in pursuit of insane ideological goals opposed by all those who will be impacted by it.

> Top EU officials only met in late October to establish the “Trump task force” once they realised that there was a real possibility of him winning.

Maybe they should spend sometime actually trying to govern their own feckless continent rather than worrying about the fact “orange man bad”.

The whole of Europe is stuck in a tarpit and is fighting harder only to find itself sinking deeper into the morass.

j watson
j watson
18 days ago

‘Necessity is the mother of invention’ as they say, so it’s just poss that some upsides may be stimulated by the combination of geopolitical challenges Europe currently faces. German election in Feb may also give momentum to a reset – of course assuming clear result.
For unrelated reasons been reading J Winik’s the Great Upheaval, and within it tells the story of how the 13 US States only really came together with a Federal arrangement after serious post revolutionary War crisis. And as a result US history entirely different from what it might have been, and hence world history too. ‘Necessity the mother…’