The ghost of inflation haunts Europe: increases not seen in more than 30 years and fear for the future

Holland 11.9%. Spain 9.8%. Belgium 9.3%. Germany 7.6%. Italy 7.0%, France 5.1%. Euro zone average 7.5%. These percentages are the latest known inflation data in Europe. If they seem trivial to the Argentinian reader, in Europe they can have profound political consequences.

Europeans haven’t seen such inflation rates for at least 35 yearsin some countries since the oil crises of the 70s of the last century.

European inflation is mainly due to two causes. After years of cheap money, of having the European Central Bank buying hundreds of billions of euros of government debt a year and yet annual inflation that never reached 2% with years on the verge of deflation, the pandemic changed everything.

Most citizens kept their income but stopped travelling, shopping, going out at night, spending.

A market in Berlin, Germany, with new prices. Photo: AP

When governments lifted restrictions due to the pandemic, the sudden rise domestic demand was such that it caused bottlenecksfor example in the production of semiconductors, necessary for almost all devices with an electrical system, from televisions to cars.

Temporary inflation?

Six months ago, during the European autumn, the European Central Bank repeated week after week that this inflation was temporary, that it would go away as quickly as it had come and that it was not planning to take exceptional measures to stop it. There would be no rate hike. We just had to wait.

The European Central Bank plan was floundering until the threads were crossed for the 21st century czar and he attacked Ukraine.

Russia is the main exporter of hydrocarbons to Europe. Sanctions, war and market fears have triggered the price of oil and especially gas.

With them, due to European regulations that govern the electricity pricing system, electricity has exploded. Its weight in the basket of products with which inflation is calculated has caused it to soar.

Eurostat, the statistical office of the European Commission, explained in a report on Friday that the average inflation in the euro zone is 7.5%, but if energy products were discounted, it would be 3.4%.

These figures, which are repeated in practically all European countries, mean that energy currently accounts for more than half of the inflation suffered by Europeans, while household expenditure on energy products represents far from half of its total cost.

The pandemic and the war in Ukraine triggered inflation in Europe.  Photo: AP

The pandemic and the war in Ukraine triggered inflation in Europe. Photo: AP

The risks

Governments and the European Central Bank are already monitoring what they see as a danger, what are called second-round effects. Inflation is rising and as it is used to calculate from public wages to pensions through social assistance, these should rise in the same way.

Despite the fact that inflation data is “doped” by energy prices. In some countries, such as Spain or Belgium, we already speak of “rental contracts”.

This is for employers and unions to agree wage increases below inflation on the condition that employers also adjust their profit margins so as not to pass them on to prices and cause widespread inflation. Everyone is tightening their belts.

Due to the weight of energy in inflation, the European solution should be to reduce these energy prices. The most cautious analysts assure that there is no certainty about the economic blow that Europe will take and certain finance ministers, such as the Frenchman Bruno Le Maire, assure that the blow of the rise in gas “is comparable to the shock of the outbreak of the first oil shock in 1973.

A clothing store is selling products 50% off in Berlin, Germany, this Saturday.  Photo: AP

A clothing store is selling products 50% off in Berlin, Germany, this Saturday. Photo: AP

The price of gas (the Dutch TTF, the benchmark in Europe) rose from 76 to 340 euros per megawatt hour in the two weeks from February 22 to March 8.

The weight of hydrocarbons in the economy is lower than it was five decades ago. The amount of energy required for the same level of production has fallen by 40% in half a century. Europe uses less energy and a large part of this energy is renewable (in the Spanish or Scandinavian case it is around 50%).

The European Central Bank says that sees no risk of stagflation (inflation with economic recession) neither in 2022, nor in 2023, nor in 2024. Governments, on the other hand, seek any measure that controls prices because they can pay for it at the ballot box.

The far right dropped the issue of immigration for a while and in recent weeks they are only talking about prices.

Only Europeans over 50 have memories of double-digit inflation. The others enter a new world that puts an end to the dream that each generation would live better than the previous one.

Europeans who entered the workforce after 2008 (the fall of Lehman Brothers and it’s been 14 years) were born with a changed foot. To the worst financial crisis since the Second World War they added the worst pandemic in a century and without rest the first great war in Europe for 80 years. A long period of inflation would be the last straw.

Brussels, special


Mary I. Bruner