The pandemic will soon be over – at least from an economic point of view. By December, the last EU member states should have reached the economic output of the end of 2019 again: before the Covid crisis caused gross domestic product to shrink almost everywhere. That goes from the growth forecast of the EU Commission, which was presented in Brussels on Thursday. Last year, 20 out of 27 countries broke the pre-corona mark. Germany is one of the seven laggards. The local industry is suffering greatly from the global supply bottlenecks, for example for semiconductors.
The authority slightly lowered its forecast for this year’s growth in the EU to four percent. Germany would be below average at 3.6 percent, but unlike in 2021 it would no longer be at the bottom of the 27 countries. At the same time, the Commission significantly increased its forecast for inflation. Three months ago, Brussels economists were still assuming that prices in the EU would rise by 2.5 percent in 2022. According to the new estimate, it should be 3.9 percent, twice as much as the European Central Bank (ECB) is aiming for.
“The high price pressure is likely to continue until the summer,” warned Economics Commissioner Paolo Gentiloni. “After that, however, inflation should go down” because supply bottlenecks would be eliminated and energy prices should increase less, the former Italian Prime Minister added. “However, the uncertainty and risks remain high.”
In the 19 euro countries, the price increase rate will reach its highest level in the first quarter, the authority estimates: consumers will have to spend an average of 4.8 percent more on their purchases than a year earlier. After that, inflation should slowly decrease and fall below the ECB’s target of two percent again in the coming year.
The question of how quickly the inflation rate falls is important for the thorny debate about when the European central bank in Frankfurt should tighten its loose monetary policy. The new President of the Bundesbank, Joachim Nagel, announced in his first interview that he would like to decide on his demands on ECB President Christine Lagarde in March. If the picture does not change by then, “I will advocate normalizing monetary policy,” he said time. The central bank would then have to stop its bond purchases this year; the zero interest rate policy could also end.
Commissioner Gentiloni will also make important decisions in March. The Commission is expected to publish guidance on government budgetary policies for the coming year earlier this month. The Stability and Growth Pact actually sets an upper limit for the annual budget deficit of three percent of economic output and a target for total government debt of 60 percent of economic output. But because of the pandemic, the Brussels authority has suspended these sound financial management rules to allow governments to prop up their economies freely.
Gentiloni has good news for his native Italy
At the beginning of 2023, however, the stability pact should be activated again, and according to forecasts only seven out of 19 euro countries will be able to meet the 60 percent mark that year. Only twelve countries can meet the three percent requirement. The commission launched in October a reform debate for the pact on; she intends to present proposals by the summer. But it is uncertain or unlikely that these new rules will come into force as early as the turn of the year.
Therefore, the old pact will probably apply first in 2023 – and this would normally mean that the Commission would have to urge highly indebted countries like Italy to reduce the debt level quickly. The Stability Pact stipulates that such countries should reach the 60 percent mark within twenty years. Italy is at 150 percent and would therefore have to aim for completely illusory budget surpluses for twenty years.
But apparently Gentiloni wants to make it clear in his orientation guide in March that the authority will not apply this rule, since reforms are being discussed anyway. This reports the news site political. In fact, it is almost certain that the Commission’s proposed amendments to the Pact will also affect the 20-year rule. Social Democrat Gentiloni, speaking at an Italian university just this week, said the reforms “are intended to ensure that high levels of debt are reduced in a slower and more realistic way without stalling growth”. His compatriots will have liked to hear that.