The Euro-zone is suffering because of the turmoil in Ukraine, and it may eventually tip it over the edge. Everything resulting from Russia’s involvement is detrimental to the already troubled region. A recipe for disaster is created when you combine rising energy costs with slow growth and a growing trade deficit with China. The inflation front also demonstrates this.
Reuters reported that in May, the inflation rate for the Eurozone climbed to another new high. From 7.4 percent in April, inflation increased to 8.1 percent in May. The fact that it is no longer merely energy driving up the headline figure is a significant contributor to the issue. Inflation increased to 4.4 percent year-over-year from 3.9 percent when we look past the headline statistic and exclude food and energy costs. The European Central Bank is under pressure to raise rates further because of this. The timing of such a move is terrible since the conflict between Europe and Russia has highlighted how weak Europe is.
The prospect that the Ukraine conflict will continue, and that Russia may entirely cut off gas to Europe looms large in the background. Now, it looks like Russia wants to prevent Europe from stockpiling, which would greatly boost its power during the winter. If Russian gas supplies are further reduced, gas rationing is already being discussed. Russia has significantly slowed the flow via the Nord Stream during the last three months and cut off supply to many European nations that refused to pay for gas in rubles. Due to this, Germany’s flow of commodities has decreased by almost 60% and has been shut off to France.
ECB officials must raise rates while the economy is going into reverse since inflation is currently running at 4 times the ECB’s 2 percent target. It is difficult to decide between political instability brought on by economic hardship and runaway inflation. Since underlying inflation is still rising, several officials and economists are skeptical that moderate changes will be sufficient.
Prices have been rising across Europe because of supply chain issues following the outbreak and later because of Russia’s conflict in Ukraine. This means that a decade of extremely low inflation is now being replaced by a new era of quickly rising prices. What many economists attempted to dismiss as a brief increase in prices is now becoming a permanent feature of the economy. The worry is that once rising energy prices start to affect the economy, inflation will become entrenched and eventually continue to drive up prices and wages. A significant risk is the impact of an increase in negotiated salaries on core inflation.
The problems facing the euro-zone are being exacerbated by data from Eurostat, the statistics body of the European Union. It demonstrates how the cost of imported energy surged significantly in January, turning the euro zone’s trade balance from a surplus to a record deficit.
Volkswagen CEO Herbert Diess recently warned the Financial Times that the economic costs of the war could be “very much worse” than those of the epidemic. Stagflation is the result of both inflation and a sluggish economy. Savings will be destroyed if the economy collapses, and European corporations would go into default.
The Euro-zone region’s lack of competitiveness is a significant aspect that, I worry, many economists are ignoring. The EU is lagging behind the US and China in terms of technology and intellectual property. While France, Spain, and Italy are dealing with years of high unemployment rates, Germany, the region’s manufacturing powerhouse, continues to eke by, just avoiding a recession. The ugly is made worse by the fact that more than 600 billion euros worth of non-performing loans are held by the banking sector, which finances over 80% of the actual economy in the Euro-Zone. Thus, it could be argued that Brussels is leading the EU into an ambush and that Europe will soon go through its demise. In summary, the situation is such that not only are many Euro-zone residents politically opposed to Brussels exercising more control, but also the banks are holding worthless paper and are buried in bad debts. Simply said, the entire system is completely corrupt. If the euro and yen continue to decline, both European and Japanese citizens risk losing a sizable portion of their wealth.