Europe faces bad economic choices, as it fears stagflation, or what is known as “stagflation” at a time when the European Central Bank is rushing to raise interest rates.
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The International Monetary Fund predicts a slowdown in European GDP growth in 2023
The European Union has faced a series of existential threats since its inception in 1993, and has weathered them over the years. But in the modern era, the “Covid 19” epidemic in 2019, whose direct repercussions are continuing until now, revealed “old wounds” that might turn into a threat to the unity of Europe, according to former European Commission President Jacques Delors.
Delors believes that “the germ is back”, stressing that unity should be more than just a slogan for the European Union in any crisis. Today, the new inflation crisis that struck Europe has emerged, and with it the talk of the “invisible” division taking place between its countries has resurfaced, especially since crises not far away have ravaged them, including the issue of the “euro” and the issue of receiving refugees.
In all the crises, the Europeans south and east were affected much more than the North and West. This crisis warned of the disintegration of the economic system, which the European Union countries were proud of. Corona revealed somewhere, the extent of the political and economic divergence between the countries of the Union, and today the talk of inflation is due to activating the same matter, as countries are now different among themselves on the need to support Ukraine in the same way, considering this support is one of the causes of the current crisis.
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It also shows the difference in numbers between inflation between some countries. For example, in Lithuania, inflation in August exceeded 25%, and Latvia recorded likewise, but France has inflation of 6.8%, which is the highest rate ever since the crisis began.
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But is the crisis caused by the Russian military operation in Ukraine? Confirms Hans Werner SinenThe former head of the Ifo Munich institute said that the main responsibility for the “extraordinarily high” inflation lies with the European Central Bank.
He said in a statement to the German “compact” website: “Claims that the blame for inflation in Europe lies with Russia alone, give only a simplified picture of the situation,” as the European Central Bank previously lit the fuse with ill-considered steps, and the crisis caused by the “Corona virus has become The spark that set everything on fire.
Senen gave the European Central Bank a clear share of the responsibility for the current crisis, which, as he puts it, is still in its infancy. It began, according to him, with the Corona crisis, and then the bank’s purchase of 5.3 trillion euros of government securities. The necessary printing of money would have led to a significant expansion of the money supply. Now the European Central Bank can only stop inflation by reselling more than €4 trillion in government securities. However, this is not possible, because its duration is 31 years, and the affected countries have no interest in it.
At the time, the Europeans differed regarding the approach and method of these plans. At a time when Italy, France and Spain were demanding the issuance of European government bonds (Eurobonds or Corona bonds), through which they would allow the pooling of the sovereign debts of European countries to become a single European sovereign debt, the “wealthy” European countries such as Germany, Austria and the Netherlands are on this plan, refusing to have their citizens pay the bill for what they describe as the “lost budgets of the countries of the south of the continent.”
Also, the approval of “Eurobonds” would have meant that the euro countries as a group would have to take common debts from the financial markets and distribute them among them and give a common guarantee for the repayment of these debts and interests. The financially strong countries will have to pay higher interest rates than now, while the debt burden for the financially weak countries will be reduced. If countries become unable to pay, the remaining countries will bear their debts and interests.
The usual waves of inflation in Europe differ from the current inflation boosted by the energy crisis, the tightening of labor market conditions, the declining performance of the euro, the European Central’s hike in interest rates at large rates, and the increasing indications of an impending recession for the European economy.
In the euro area, annual inflation rose to 9.1 percent in August, up from 8.9 percent in July, according to the latest statistics from the European Union Statistics Agency.
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This inflation reached its highest level since the start of registration for the euro in 1997. Accordingly, energy prices rose by 38.3%, food prices by 10.6%, commodity prices by 5% and the cost of services by 3.8%.
There are no bright prospects for the future, as central banks are faced with two bitter options. Economists know that recession is bad and inflation is bad, but central banks risk bringing the economy into a recession by controlling interest rates, which are their main tool for controlling inflation by putting pressure on households and companies to stop spending so much. An option that is more important than continuing high inflation rates in the long term, because the continuation of inflation for a long period may become a normal situation that will be difficult to reverse in the future.
Developed economies usually resort to raising interest rates so that inflation cannot be prevented from them, especially since high inflation rates stifle the economy and investments in the long run, while recession, if it occurs as a result of raising interest rates, may exit the economy with a little time.
Between stagnation and inflation
And the recession, if it continues over two quarters of the year, for example, it is possible that the economy will begin to improve in the third quarter, according to economic science, and it can even move to growth in the last quarter of the year, but if inflation sticks to the economy, it is likely to remain for years. In addition to the recession.
This is a scientific analysis, but for its part, the International Monetary Fund expects a slowdown in the GDP growth rate from 3.2% in 2022 to 2.9% or 2% during 2023 with a growth rate of almost zero in Europe during 2023. Therefore, inflation is at its levels Currently, it poses a threat to the current and future macroeconomic stability of Europe.
During periods of inflation, excess money abounds in the economy, which often results from bank lending or printing money from the central bank, and the inability of the economy to produce enough goods and services to keep up with the demand for them. Persistent inflation is often a harmful economic phenomenon that leads to higher prices, which reduces purchasing power and leads to a slowdown in the economy. In recessions, prices fall because fewer goods are available for purchase, causing the money supply to decrease.
Read also: Europe heads for recession as cost of living crisis deepens
Bad choices besieged Europe, related to inflation and stagnation, as Europe fears From the occurrence of stagflation accompanied by stagflation, or what is known as “stagflation” at a time when the bank is rushing to increase interest rates.
The fear is that this step will be accompanied by weak economic growth and high unemployment, which began to rise with the spread of Corona, and thus reach Uncontrolled inflation accompanied by a strong economic stagnation, and it is a combination that can bring down the strongest global economies if they came together for several months and perhaps years in a country or continent, and accordingly each country, according to what is likely, as happened in the “Corona” crisis, will resort to working alone. To get out of a crisis that will prolong its repercussions, Economic cooperation between the countries of the Union.