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High inflation drags down European economy (Economic Perspective)

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Recently, Eurostat released data showing that the inflation rate in the euro zone reached 10.6% on an annualized basis in October, hitting a record high. Eleven of the 19 member states in the euro area have double-digit inflation rates, and the three Baltic countries have inflation rates above 20%. Inflation remains high, the energy crisis is unsolvable, and the European economy is facing multiple pressures.

Inflation is high in Europe, with energy prices at the forefront. By the end of October this year, the annual increase in energy prices in the euro zone reached 41.5%, and the second-ranked food annual increase was 13.1%. If these two factors are removed, the annual core inflation rate in the euro area is 5%, 1.3 percentage points lower than that in the United States. But the reality is that headline inflation in Europe is 2.9 percentage points higher than in the US. The differentiated inflation situation highlights the different situations of European and American countries under the energy game.

Since the Ukraine crisis, European and American countries have imposed multiple rounds of sanctions on Russia, and the energy supply and demand relationship between the EU and Russia has been disrupted. On the one hand, in order to get rid of the dependence on Russia's natural gas supply, Europe is looking for alternative suppliers around the world to carry out a drastic market diversification strategic transformation; Global natural gas prices. The soaring price of natural gas has directly driven up the price of electricity, which has become the biggest driver of inflation in Europe.

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In terms of impact, high inflation is further squeezing the monetary policy space in the euro zone. Since March this year, the Federal Reserve has tried to reverse the inflation trend through aggressive interest rate hikes and other means, and has raised interest rates six times in a row. The European Central Bank's monetary policy regulation lags behind that of the Federal Reserve, and it has raised interest rates three times. If the European Central Bank stops raising interest rates, funds will continue to flow from Europe to the United States, given that the benchmark interest rate between the euro and the dollar still has a spread of about 2 percentage points. Imports from the EU, especially key raw materials that are heavily imported and priced in dollars, will become more expensive, which could further push up inflation. At the same time, if the European Central Bank continues to raise interest rates, the spread of national debt among euro zone member states will further widen. For some heavily indebted countries, rising borrowing costs have increased the risk of a new round of debt crises.

High inflation has obviously raised the cost of production and living in Europe, disrupted the confidence of enterprises in the market, weakened the consumption power of the people, and directly affected the prospect of economic recovery. Previously, a series of indicators have shown a decline in market sentiment: In July 2022, industrial production in the EU and the euro area fell by 1.6% and 2.3% month-on-month, respectively, and by 0.8% and 2.4% year-on-year. In August, industrial producer prices in the euro zone rose by 43.3% year-on-year, hitting a record high. In September and October, the consumer confidence index in the euro zone was -28.8 and -27.6 respectively, which are close to historical lows. According to the Economic Forecast Report for Autumn 2022 released by the European Commission, the economies of the EU, the Eurozone and most member states are expected to fall into recession in the fourth quarter of this year, and economic activity will continue to shrink in the first quarter of next year.

At present, energy issues have obviously affected the European economy and society. Under the huge economic pressure, the urgency of Europe's realization of "strategic autonomy" has become more prominent. Promoting practical cooperation with other countries is undoubtedly of great significance for Europe to get out of the current economic predicament.

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(The author is the deputy director of the European Institute of the Chinese Academy of Social Sciences)

"People's Daily" (version 14, November 28, 2022)

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(Editors in charge: Zhao Xinyue, Liu Yeting)

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