Donohoe says inflationary pressure in Europe will likely be temporary

Inflationary pressure in Europe is still expected to be temporary, Eurogroup President and Finance Minister Paschal Donohoe said on Monday, even though it is taking longer than expected for it to slow down.

“When we go into 2022, I expect that we will average back to around 2%,” Donohoe, who chairs the euro area finance ministers’ meetings, said in an interview with Bloomberg TV. “But it clearly takes a little longer to get to this point.”

Mr. Donohoe’s words echo those of the President of the European Central Bank (ECB), Christine Lagarde. She and her colleagues have insisted that the price spike is fueled by temporary factors, such as energy costs, which will soon start to fade. In contrast, US Federal Reserve Chairman Jerome Powell adopted a hawkish pivot last week, suggesting that the word “transitional” should no longer be used to describe what is going on.

While the Omicron variant of the coronavirus was “of concern”, Mr Donohoe said he remained confident in the economies of the euro area. Any decision on when to phase out the current additional spending aimed at stimulating savings “is totally dependent on where we are at with the disease,” he said.

Eurozone governments should continue to spend to support the economic recovery from Covid-19, albeit in an increasingly targeted manner, and consolidate public finances only when they are well underway, the International Monetary Fund said.

In a regular report on the euro area economy presented to the group’s finance ministers, the IMF noted, however, that if consolidation itself could wait, a credible way of how it would be conducted in the future should. be announced now.

“Policies must remain accommodating but become increasingly targeted, with an emphasis on mitigating potential increases in inequality and poverty,” the IMF said.

“Fiscal policy space should be replenished once the expansion is firmly underway, but credible medium-term consolidation plans should be announced now. ”

Wages

The IMF also noted that the rise in inflation, which reached an all-time high of 4.9% year-on-year in November, was temporary and therefore was not a great threat as it did not translate into a rise in wages, called a second round effect.

“Recent inflation readings have surprised on the upside, but much of the increase still appears transitory, with significant second-round effects unlikely,” the report said, adding that the ECB’s monetary policy should therefore remain accommodating.

“Structural reforms and high-impact investments, including in climate-friendly infrastructure and digitization, remain essential to build resilience and boost potential growth,” the IMF said. – Bloomberg and Reuters

Mary I. Bruner