Why the ECB is more focused on risks than recovery
Also in this newsletter: why von der Leyen is glued to her phone at the moment
Frank Sintra
At this week’s annual conference of the European Central Bank in Sintra, president Christine Lagarde played golf with US Federal Reserve chair Jay Powell and the governors of the German and Canadian central banks. Canada’s Tiff Macklem won thanks to his long drive but Powell gave him a good run; Lagarde was surprisingly sharp around the greens.
And the chatter at the luxury resort in the south of Portugal was not just about the hazards on the golf course — ECB officials were clear about the many risks that lurk on the horizon, writes Martin Arnold.
Context: Eurozone inflation fell from 2.6 per cent in May to 2.5 per cent, data from Eurostat showed yesterday, supporting the ECB decision to cut interest rates last month based on forecasts that price growth will fall to its 2 per cent target next year.
The Eurozone economy expanded 0.3 per cent in the first quarter — ending almost a year of stagnation — and unemployment remained at an all-time low of 6.4 per cent in May.
One of the biggest risks looming is that the world economy is heading for a period of protectionism, especially if Donald Trump wins November’s US presidential election.
Goldman Sachs chief economist Jan Hatzius gave a presentation spelling out how Trump’s promise to increase tariffs on imports from the EU by 10 per cent would hit the Eurozone economy disproportionately hard — predicting it would knock 1 per cent off GDP in the bloc, while shaving only 0.1 per cent off US GDP.
Another worry for Eurozone rate-setters is fiscal policy, particularly the risk that the French election produces a far-right government which embarks on a spending spree that puts it on a collision course with investors, destroys credibility in the EU’s recently revamped fiscal rules and pushes up inflation.
“Fiscal matters enormously,” ECB president Christine Lagarde told delegates yesterday, adding that rate-setters were “very concerned” about the need for governments to bring their deficits in line with the EU’s 3 per cent limit.
The final worry is that inflation is yet to be completely tamed because wages are still rising at about 5 per cent a year, pushing up costs for labour intensive services companies that are passing this on to consumers via higher prices.
“We have to look what is behind it, which is a lot of labour costs,” Lagarde said.