For many who have been anxiously awaiting a major announcement from the European Central Bank (ECB) after a long period of high interest rates, the latest EU data released on Friday (31 May) may have ruined the mood.
The European Union's statistics office, Eurostat, showed inflation data this month came in slightly above expectations, rising to 2.6 percent from 2.4 percent in April. Reuters Inflation was forecast to be 2.5%.
Core inflation, which excludes volatile food and energy prices and is widely considered a better gauge of underlying price pressures, rose to 2.9% from 2.7%, while analysts had expected it to remain stable.
The new data could dampen expectations that the trend will continue beyond next week, when the ECB is almost certain to keep rates in check as most had expected the central bank to begin a new round of rate cuts.
Moreover, inflation has proven much more robust this year than many had expected, with headline inflation remaining stubbornly above the ECB's 2% target, even though interest rates are currently at record levels.
The ECB's decision next week comes as the euro zone economy stagnates, but analysts say the “injection of momentum” that a rate cut could provide could benefit the euro zone economy.
But it also comes amid growing concerns about a possible “divergence” of ECB policy from that of the US Federal Reserve, as inflation across the Atlantic proves even more stubborn than in Europe.
In particular, many analysts have warned that the ECB's decision to cut rates before the Fed's could cause the euro to weaken against the dollar, making imported goods more expensive and ultimately driving up prices overall.
To date, financial markets are pricing in just one further rate cut since June, fewer than the six total cuts expected through early 2024. This remains unchanged after the release of this morning's data.
So today's data is unlikely to change the ECB's decision next week, and probably not this year either, but whether it changes what happens after 2024 is an open question.
This week's chart
According to combined trade data from the World Bank and OECD, trade with global partners accounts for a significantly larger share of the EU's economy than those of the US or Chinese economies.
The figures for the 30 years to 2022 will therefore confirm that the 27-nation European Union appears to be more committed to the principles of free trade than the other two countries in the world, as trade ministers said on Thursday (see first article below).
In 2022, EU trade as a share of GDP soared to a record high of 105%, compared with just 27% in the US and 38% in China.
Economic Policy Overview
EU trade ministers reaffirmed their support for free trade, even as a top US trade official suggested Washington would all but abandon market mechanisms. European Commission Executive Vice-President Valdis Dombrovskis said on Thursday (30 May) that “trade openness” has “contributed enormously to the development of the global economy and helped lift millions of people out of poverty.” He noted that “trade will continue to play a vital role for the EU's competitiveness and prosperity,” but added that the EU should still “be mindful” of trade's “harmful” effects on the environment and workers' rights. Dombrovskis was responding to EuraActive's questions about U.S. Trade Representative Katherine Tai's comments on Wednesday that “there are limits to following the market” and that unrestricted free trade ultimately harms workers. Read more.
EU policymakers want to mobilise more private capital for investment through Capital Markets Union (CMU), but high capital requirements prevent insurers from “playing a bigger role”. Industry group Insurance Europe issued a warning on Thursday (30 May), calling for a review of how the rule is calculated. Insurers play a big role in the CMU plan, investing around 6.6 trillion euros a year in EU shares, corporate and government bonds. But the industry group warned that the way the capital charge is calculated and the range of investments insurers can be involved in are hindering insurers' role in financing their wider assets and operations. “A review of Solvency II needs to realise its potential to solve this problem,” it said. […] Current excess capital of the framework [charges] “This creates unnecessary barriers for long-term, guaranteed, profit-sharing products,” the association wrote. “In the case of stocks, [revising insurers’ capital treatment would] “This means determining capital charges based on the risk of long-term underperformance of assets and not just a short-term transactional risk approach,” the position paper adds.
Two leading economists at BNP Paribas said Europe was facing a “generational change” in its economic structure that would see inflation reach its highest structural level since the early 1980s. Coon de Loos and Philippe Ghissels, chief economists and chief strategists at BNP Paribas Fortis, told Euractiv that rising public debt levels, geopolitical fragmentation, an ageing population and climate change will lead to almost permanent price increases that will inevitably force central banks to keep interest rates at their highest in decades. While price stability should be at the core of the ECB's official mandate, the two analysts expect 3% inflation to become the “new 2%” reference target. “We are experiencing a generational shift at the moment, and the last big one was in the early 1980s,” Ghissels said, referring to the time in 1981 when former Federal Reserve Chairman Paul Volcker raised interest rates to a peak of 20% to tame the hyperinflation of the 1970s. Read more.
Imposing tariffs on Chinese electric cars to protect European industry is the wrong approach to promoting international competition, Germany's liberal Transport Minister Volker Vissing told Euraactive in an interview.“Global competition provides an incentive for German car manufacturers to build better and cheaper cars,” Wissing told Euractive. “I'm not worried that the German car industry will not survive this competition.” Wissing said he is “baffled that some people are now calling for state restrictions on competition,” adding that “this has nothing to do with a market economy.” “In the end, you have to ask yourself: do we want to go ahead with such a major transformation process along the blueprint of economically dysfunctional East Germany?” [German Democratic Republic]Or should we stick to the successful model of the Federal Republic of Germany?”
European CEOs' assessments of the business environment both within and outside Europe are at their highest level ever. A survey published on Wednesday (May 29) found that European CEOs' confidence in their companies' prospects outside Europe surged to a three-year high in the first half of the year, while expectations within Europe are virtually stagnant. “Leaders are optimistic about their companies' investments and jobs outside Europe, but expectations within Europe are much bleaker,” said Ilham Kadri, president of Syensqo and chair of ERT's competitiveness and innovation committee. “As a place to do business, Europe appears to be on a path of relative decline,” he added, warning that “Europe's next leaders must prioritize a turnaround that puts competitiveness at the forefront in their work plans for the coming years through to 2030.” Read more.
The right-wing argument that Europe must sacrifice climate action to become more competitive is unfounded and increasingly rejected by business leaders, says a MEP representing Germany's Green party. Rasmus Andresen, who also sits on parliament's economics and finance committee, explained that more and more corporate executives are realising that global warming is expected to have devastating long-term effects, negatively impacting profits. “The majority of industries and businesses are [ahead on climate policy] “It's better than some of the politicians in the European People's Party (EPP),” he said, a center-right grouping expected to maintain its position as the strongest parliamentary coalition after June's European elections. Read more.
[Edited by Anna Brunetti/Zoran Radosavljevic]
