Only Germany is weakening: the EU Commission foresees rosier times

Only Germany is weakening
EU Commission foresees rosier times

05/15/2023 11:22 am

The EU Commission sees the crisis as a brightening light at the end of the tunnel: Compared to February, it is raising its economic forecast for the euro area – but not for Germany. This is also due to the high inflation compared to the EU.

The EU Commission is more optimistic about the economic prospects in the euro zone than it was in the winter and is also anticipating persistently high inflation. According to the spring forecast, the Brussels authorities expect the countries of the monetary union to have an increase in gross domestic product (GDP) of 1.1 percent in 2023. In February, it had only estimated 0.9 percent.

The economy coped well with the risks arising from the Ukraine war and proved to be resilient: Significantly lower energy prices made themselves felt and reduced the costs of companies, it was said. The European economy is in better shape than assumed in the autumn, said EU Economic Commissioner Paolo Gentiloni.

From Brussels’ point of view, however, nothing has changed in the meager prospects for the German economy: As forecast in winter, it should only grow by 0.2 percent. The EU Commission assumes that price pressure will remain high for some time. “Inflation has proved more stubborn than expected,” Gentiloni stressed. The Commission expects an inflation rate (HICP) of 6.8 percent for Germany in 2023 for a European comparison, in February it had predicted 6.3 percent. For the euro zone, it now estimates inflation of 5.8 percent after 5.6 percent in the winter forecast.

The inflation rates in Germany are likely to remain high at 2.7 percent and in the euro zone at 2.8 percent next year. The European Central Bank is aiming for a medium-term rate of 2.0 percent for the euro area, which is considered ideal for the economy. ECB chief economist Philip Lane expects inflation in the euro area to ease significantly over the course of the year. In April, the inflation rate rose slightly to 7.0 percent, after falling to 6.9 percent in March – from 8.5 percent in February.

Brussels sees a need for further rate hikes

In the spring forecast, the EU Commission assumes that the European Central Bank will raise interest rates further. According to the report, a longer period of increased core inflation, i.e. the inflation values ​​after factoring out fluctuations in energy prices, would speak in favor of even more vigorous action by the central banks.

In addition, the EU Commission is calling on the countries in the currency area to end their support measures in view of the fall in energy prices, especially the untargeted ones, “in particular to ensure the sustainability of debt, but also to support the efforts of the central banks to fight inflation,” it says . At the same time, the EU Commission admits that the relatively robust economic development is primarily the result of the measures introduced by the EU and its member states. “The diversification of energy sources and infrastructure investments to address gas supply shortages and promote renewable energy, also supported by the Recovery and Resilience Facility, have paid off,” she says.

In particular, the adjustment of the private sector has been impressive. “Under the pressure of high prices, households and businesses have reduced their gas consumption well below the voluntary target of 15 percent savings set in the emergency ordinance.” Since gas storage has reached a seasonal high, the risk of future bottlenecks has dropped significantly.