Though inflation in the European Union keeps falling, Germany seems to have lost its economic balance.
For the second month in a row, inflation in the European Union fell more than expected, fueling market optimism. Consumer prices in the European Union fell to 5.5% annually in June, while Reuters polled analysts predicted a fall to 5.6%.
This represents a significant drop from the 6.1% inflation level in May, and an even more significant one compared to 7% in April. In short, inflation in the European Union fell by 1.5% in just two months, a positive sign that prices might be coming back to normal.
Similarly, inflation in the United States is also exceeding expectations, falling to 4% year-on-year in May after a 4.1% forecast.
Unfortunately, both in the European Union and in the United States inflation is far too high to put down defenses. In both economies, the ideal inflation target level is 2%.
Inflation keeps falling thanks to central banks. On both sides of the Atlantic, and indeed in the vast majority of the world’s central banks, interest rates have been steadily increasing since early 2022.
By raising interest rates, a central bank limits the amount of liquidity in the system, thus appreciating the currency and decreasing inflation. High-interest rates, however, have the crucial counter-effect of slowing down economic growth, leading to recession.
Indeed, many predict the United States will fall into recession in 2023. Furthermore, both the Eurozone and Germany, the largest economy in Europe, have been in recession since June.
Germany’s stagflation
As a matter of fact, 2023 could be the year Germany loses its economic superpower status.
Not only is Germany the only major EU economy in recession, but its inflation also keeps increasing. In June, Germany’s inflation rose to 6.4% annually, a 0.3% jump from May.
Germany is spiraling into an economist’s worst nightmare: Stagflation. A scenario where prices are high and the economy is in crisis at the same time.
Historically, stagnation has hampered countries’ growth for decades, as there is no recipe to fight it. For example, Germany fell into deadly stagflation after World War I, which resulted in a terrible socio-economic crisis leading to the rise of Hitler.
Of course, today’s situation is much different. Nevertheless, Germany must find a way to correct the situation before it is too late, otherwise they will lose their economic and political status in Europe.
Though France is ready to eat the spoils, a German collapse could end the EU project. Divided again, Europe could fall into oblivion, losing its only chance of peace and stability.
