Germany and France posted better-than-expected inflation data: what will happen next in the European Union?
What’s next for the European Union? On Wednesday, the bloc’s largest economies, Germany and France, released their monthly and annual inflation data. The outlook was better than expected, a sigh of relief for the stagnating European Union.
Germany’s Consumer Price Index (CPI) dropped to 2.9% year-on-year from 3.8% in December 2023. The CPI is a measure of how much the prices of goods have changed since the previous period. The European Central Bank, like every central bank in developed economies, uses 2% as the ideal target for CPI.
For the full year 2023, Germany’s inflation increased 5.9%, one of the highest measures since the country’s reunification but down from 6.9% in 2022.
After Russia invaded Ukraine, Germany was hit by a severe energy and price crisis, with waves of recession and deindustrialization battering Europe’s largest economy. In 2023, The Economist called Germany “the new sick man of Europe”.
France, on the other hand, avoided an energy crisis as significant as Germany’s, but its economy stagnated nevertheless due to its proximity to Ukraine and Russia.
Inflation in France also decreased more than expected though, coming in at 3.1% year-on-year (down from 3.7% in December 2023).
Food, energy, and shelter prices are increasing at slower paces across the entire economic bloc. Every economist in the world is therefore asking: when will Europe be competitive again?
Cutting interest rates
Part of the reason why inflation declined so much in recent months was the record-high interest rates set by the European Central Bank. These levels, however, also caused the EU economy to stagnate, growing only 0.1% for the full year 2023.
European markets are pricing in the first rate cut already in March 2024. Although this appears very likely, the ECB still has “higher for longer” as its official strategy.
Per the ECB official site: “The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75%, and 4.00% respectively.”
Even if cuts came in earlier, however, the effects would not be felt for months or even years. Indeed, the worst effects of last year’s hikes might still be ahead of us.
For many economists, the ECB overdid with its hike policy. Inflation came down fast, but it cost the EU a full year of growth during times of uncertain geopolitical scenarios.
