Europe’s big problems

Europe’s problems > US problems

The U.S. economy faces plenty of problems and may well be inching toward a recession. But they look enviable when stacked up against the challenges facing European policymakers, who gather for a high-profile conference in Portugal this week.

Why it matters: The world economy could benefit tremendously from a robust, non-inflationary Europe. Alas, events are not cooperating.

  • Inflation in Europe is nearly as high as in the U.S., but the underlying growth trend is weaker and dependence on Russian exports higher. Meanwhile, new strains in the continent’s debt markets evoke uncomfortable memories of the Eurozone debt crisis a decade ago.

Driving the news: Top policymakers are gathering today in the ancient resort town of Sintra, outside Lisbon, for an annual conference, where they will grapple with the economic woes facing Europe and the world.

  • The agenda includes a speech by European Central Bank president Christine Lagarde on Tuesday morning (Portuguese time) and a panel discussion with Lagarde, Fed chair Jerome Powell, and other bold-faced names in central banking on Wednesday.

By the numbers: Inflation in the Eurozone reached 8.1% for the year ended in May, the highest since the currency bloc was formed. As in the U.S., that was heavily — but not entirely — driven by higher energy prices.

  • Energy prices were up 39%; but even excluding food, alcohol, tobacco and energy, inflation was 3.8%, far above the 2% the ECB aims for.
  • Still, the ECB has moved more cautiously than the Fed in raising rates, with a key deposit rate negative and its first rate increase expected in July. This has driven the euro down against the dollar, further adding to European inflation.

One force multiplier of Europe’s economic situation: the spike in fuel prices. That, in effect, is creating higher prices for businesses and consumers, with little offsetting gain.

  • By contrast, the United States is a major energy producer, so high energy prices have a silver lining of bolstering the oil sector.
  • Moreover, Europe has stronger labor unions, so ECB officials have to worry more about temporary energy-driven inflation becoming entrenched in wage demands, and creating sustained inflation.

State of play: Meanwhile, the gap between borrowing costs for “core” European economies of Germany and France — and those on the periphery, particularly Italy and Greece — have widened in recent months.

  • Some of that is healthy evidence of markets working. During a time of turmoil, it is natural that borrowers perceived as riskier would have to pay more to borrow, as is the case in corporate debt markets.
  • But if unchecked, it raises anew questions about the ECB’s commitment to a unified monetary system. That’s why the central bank has taken stepsto help backstop the debt of peripheral countries, lest those spreads widen too much.

The bottom line: Sintra’s weather forecast this week is cloudy, with some rain. Those conditions fit Europe’s gloomy outlook.


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