Inflation “sinks” the economy: The Eurozone is on the brink of a new crisis – What does the Eurostat report show

Debt crisis, pandemic, energy crisis, war… For more than 14 years, economies have been attacked from every side and tested in every way. The repeated crises, culminating in the current combination of pandemic, precision-energy and war, have caused an explosive mixture in the Old Continent and especially in the eurozone, which is looking for solutions to a series of issues, having as its main opponent… its own self and the procrastination of the decision centers of the European Union.

Her last report Eurostat no longer leaves room for doubt. The European economy is entering a new period of crisis, with the wounds from the previous blows still open. Sanctions on Russia may have been necessary after the invasion of Ukraine, but Brussels in general and governments in particular were once again caught off guard.

The precision in energy and the domino revaluations caused across the spectrum of products and services have caused a spike in inflation and social pressure, with analysts now openly expressing serious fears of a new debt crisis for the eurozone countries.

The decision of the European Central Bank (ECB) to increase interest rates, in order to hit inflation, does not seem to bear immediate fruit, at the same time as it significantly increases the cost of living (for households that have borrowed and especially mortgages), increases significantly the borrowing costs of businesses and thus “cuts” investments and increases to a critical level the external debt of all eurozone countries, especially those that have a high percentage in relation to their GDP, such as Greece (and not only sure).

The combination of the ECB’s direct decisions and their obstruction Brusselswhich stubbornly refuse to adapt to the new data, even by disconnecting – at this stage – the state budgets from the debt to GDP ratio, seems to activate the – bad – scenario that economists feared: The increase in interest rates to drag the European economy, into a new debt crisis and recession.

The Eurostat report

As stated by DW, according to Eurostat’s new data for October, which it released today, inflation in the eurozone as a whole now reaches 10.7%. This is the worst percentage that has been recorded since the eurozone began to function in practice in 2002. In fact, this percentage even exceeded the forecasts of economists, who placed their estimates for October at around 10.2%.

The countries with the highest inflation rates, mainly due to explosive increases in energy prices, are Estonia, Lithuania and Latvia with inflation around 22%. France and Spain recorded the lowest rates in October, with inflation around 7%.

In Germany, it was announced on Friday that inflation is reaching 10.4%, breaking one post-war record after another. In Greece, however, inflation in October fell below the critical limit of 10% (at 9.8%).

The ominous inflationary pressures throughout the EU and especially in the eurozone countries have been causing intense concern among experts for months. “The dynamics of inflation are scary,” Thomas Gitzel, chief economist at VP Bank, told the German news agency. And economist Christoph Weil from Commerzbank estimates that “inflation has probably not reached its peak.”

The ECB is on alert again

At the same time, the pressure on the European Central Bank to intervene, continuing to raise interest rates, is increasing. What is of particular concern to both the ECB and economists in Germany and the rest of Europe is that inflation in the eurozone now appears five times higher than the 2% target, which is seen as optimal for the economy.

According to the Chief Economist of Commerzbank Jörg Kremer, the ECB should at the board meeting in December focus on the immediate reduction of inflation and not so much on the future risk of recession. Already a first “bell” is the inflation rate at 10.7% in itself, because it already exceeded the ECB’s estimates of inflation around 9.2% in the last quarter of 2022.

Gerg Kremer reckons the eurozone urgently needs another bold rate hike of 0.75 percentage points in December. According to the governor of the Dutch central bank, Klaas Knott, the increase in interest rates at the next meeting on December 15 is expected to at least move to +0.50 points.

More difficult next winter

European economies were caught off guard this winter as Vladimir Putin’s countermeasures to sanctions against Russia had immediate consequences. However, Europe had managed to procure the necessary energy products and is in the process of making decisions to save resources.

But there is next winter. Although there is sufficient time for the “27” to make decisions, the problem is located at another, more substantial level. Unless a miracle happens and Western relations with Russia are restored, Europe will be faced with a huge issue:

1) Either it will not have sufficient quantities to cover its needs

2) or it will be supplied with -much- more expensive energy, from other sources.

The creation of new structures is ongoing, but on the one hand not everything is covered within a year and on the other, the issue of accurate energy is not addressed.

Already, the Commission seems to have turned its attention to 2023 and the following winter, in order on the one hand to cover Europe as a whole in terms of energy needs and on the other hand to avoid a new recession, which could be fatal overall for the European edifice.

SKAI, DW

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