Eurogroup seeks path between high inflation and slower growth

BRUSSELS (AP) — Euro finance chiefs ventured into an exercise in political balancing act driven by conflicting economic forces on Monday: weaker growth prospects and higher inflation.

Finance ministers from the 19 countries that share the euro currency have pledged to continue the fiscal stimulus of the European economy amid headwinds caused by the highly transmissible variant of the omicron. At the same time, they sought to reassure voters by vowing to remain vigilant in the face of steep price increases.

“Am I worried about inflation? Obviously yes,” Dutch Finance Minister Sigrid Kaag told reporters in Brussels, where she was attending a meeting with her eurozone counterparts. “The purchasing power of individual citizens will be affected.”

The euro zone faces slowing economic growth this year after a strong recovery in 2021 from a severe coronavirus-induced recession two years ago. But soaring inflation, which hit a record 5% in December and is linked to a squeeze in the energy market, has complicated the situation for policymakers and voters alike.

Ioanna Orfanou, a small-scale olive and pomegranate grower along the eastern coast of Greece, said the prices she paid for fertilizers and insecticides rose to alarming levels in the second half of the year. last year.

“This trend is very worrying,” Orfanou told The Associated Press. “It’s getting harder for small farmers to stay in business because we have limited flexibility to pass cost increases on to average consumers.”

Such sentiments have helped raise questions about the European Central Bank’s policy of keeping the euro zone’s money supply loose to fuel economic activity.

The Frankfurt-based ECB has offered support in two main ways: keeping interest rates at or below zero and helping to keep other market borrowing costs low by buying hundreds of billions of euros in assets in the financial markets.

Daniel Gros, a member of the board of the CEPS think tank in Brussels, said the ECB should now act in a nuanced way by ending pandemic-induced asset purchases while keeping interest rates at levels. current ultra-low.

“The economic emergency caused by the coronavirus is over and there is a danger, although probably small, that inflation in the euro zone will remain too high for longer,” Gros said by telephone.

The European Commission forecasts the euro region’s gross domestic product to grow by 4.3% in 2022 after an estimated 5% growth last year and a contraction of 6.4% in 2020.

Still, forecast growth is ahead of projections of a maximum GDP expansion of 4% this year in the United States, where the central bank warned of economic threats of inflation and signaled an impending tightening of monetary policy. .

By contrast, ECB officials, including President Christine Lagarde, signaled they were in no rush to raise interest rates, saying eurozone inflation would return to the 2% target. from the bank in due time.

The Commission, the executive arm of the European Union, has predicted a further slowdown in eurozone economic growth in 2023 to 2.4%.

“We remain very aware of the risks and challenges ahead,” Irish Finance Minister Paschal Donohoe, who chairs the group of eurozone finance ministers, told a news conference after Monday’s meeting. .

As growth prospects dim, national governments in Europe are pushing ahead with plans to spend hundreds of billions of euros in unprecedented European funds raised to help overcome the crisis caused by the pandemic.

At the same time, some countries, including France, are pushing for looser European limits on national debt to allow more room for growth-boosting public investment. This will require concessions from Germany, a traditional advocate of fiscal austerity.

“More prosperity is needed for Europe,” French Finance Minister Bruno Le Maire told reporters. “More growth is needed.”

In this context, employment trends in Europe could play a key role for policymakers in the coming months, as a tighter labor market can lead to wage increases and, by extension, higher inflation.

So far, the European Commission has cited the continued slowdown in European labor markets and predicts that the unemployment rate in the euro zone will fall to 7.5% in 2022, from 7.9% in each of the two years. previous.

But Greek farmer Orfanou has issued a potential warning on this front, saying she has faced demands for higher wages from seasonal workers.

“They cited rising inflation and took advantage of a sudden shortage in the supply of these workers in Greece,” Orfanou said.

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