Aurelia Butler

Biden will attend the G7 summit at Schloss Elmau in southern Germany on June 25, where leaders will discuss the war in Ukraine and the food and energy crisis it has precipitated, Jean-Pierre said in a statement. At the NATO gathering in Madrid on June 28, allies are expected to focus on NATO’s “transformation over the next decade”, the statement said. (This story refiles to make headline read ‘summits’) More

To many seasoned observers of monetary policy, the following two statements are contradictory. The eurozone faces a considerable threat of recession later this year. Even so, the European Central Bank should withdraw monetary support from the eurozone economy and raise interest rates.For years it has been the correct response for European central bankers to support spending in difficult times with looser monetary policy and to do everything possible to avoid a recession. After all, the ECB won acceptance as a powerful and respected institution only when the central bank, led by then president Mario Draghi, pledged to do “whatever it takes” to boost the continent’s economy almost exactly a decade ago. The promise of unlimited monetary firepower quickly ended the eurozone crisis.In 2022, the circumstances are not remotely similar to 2012 and policy needs to adapt accordingly. Ten years ago, Europe was engaged in an austerity drive to improve public finances, unemployment across the bloc was over 10 per cent and rising, inflation was only a little over 2 per cent and falling. That was an economy that needed stimulus. Today, unemployment across the eurozone fell to 6.8 per cent in March and April, its lowest level since the creation of the single currency in 1999, while inflation rose to 8.1 per cent in May. In place of austerity, European nations are planning their spending under the €800bn recovery fund.Although the similarities with a decade ago are few, this is still not enough to make the case for tighter monetary policy that the ECB is likely to advance at its meeting on Thursday. For that we need to look more closely at the forces affecting supply and demand in the eurozone economy and the risks surrounding different policy actions. Growth has slowed considerably since the strong recovery from coronavirus last summer. Gross domestic product across the eurozone rose only 0.3 per cent in the final quarter of 2021 and 0.2 per cent in the first quarter of 2022, which coincided with Russia’s invasion of Ukraine. In the quarters ahead, demand will be boosted by the removal of most Covid-19 restrictions this summer, especially for the providers of consumer-facing services, but it will be held back by the cost-of-living squeeze of higher energy prices on consumer incomes. But whether growth rates remain anaemic or turn negative, the brutal truth is that Europe needs to spend less on other things because, as a net energy importer, the surge in the cost of oil and gas has made everyone poorer. If there is no recognition of this, demand will continue to exceed supply and turn a temporary rise, predominantly in energy prices, into more problematic and persistent general inflation. This would happen with weak growth rates, similar to those of recent quarters, or even in a shallow recession. The ECB estimates the effective tax on consumers of higher gas, electricity and petrol prices amounts to 1.3 per cent of national income. That, at a minimum, is the hit everyone has to take. While in 2011, the central bank erred because it expected energy and food price inflation to persist at a time of economic depression, the more relevant policy error for today’s circumstances occurred in the 1970s. Then, the countries that rapidly killed inflationary impulses with tight policy, led by the West German Bundesbank, took the pain and suffered a short and shallow downturn. Price rises were temporary and did not become ingrained into daily life. Those that followed a more accommodating path — Italy and France — ended up with persistently higher inflation rates that required much deeper recessions in the early 1980s to stamp out inflation.This is therefore the moment to take early action to prevent the foothills of an inflation problem turning into a mountain. There are signs that price rises are becoming broader across goods and services in Europe. In April, three-quarters of all individual goods and services saw prices more than 2 per cent higher than a year earlier, showing companies are increasingly willing to raise prices rather than take a squeeze in their margins. Long-term inflation expectations have risen sharply in financial markets and are no longer languishing below the ECB’s 2 per cent target. With inflation at 8 per cent and the ECB’s policy interest rate still negative at minus 0.5 per cent, the real rate of interest is extraordinarily low even with the tighter policy flagged by the central bank. The ECB is right to signal it will raise interest rates in July and then take them out of negative territory by September. The economic situation is ugly. But the risks would be greater if the central bank did nothing. A faltering eurozone economy can be boosted again by looser policy if the downturn proves deeper than required to keep inflation in check. In contrast, the costs of dealing with a loss of confidence in the authorities’ ability to control prices would be considerable.The months ahead will be miserable for European economies. Incomes will be squeezed, a recession is quite likely and interest rates need to rise, adding to pressures on households and families. It will be difficult. But that is the adjustment that every European economy needs to make as we wean ourselves off cheap, but ultimately dangerous, Russian energy. [email protected] More

The cabinet reiterated that China will strive to achieve reasonable economic growth in the second quarter, state media said after a regular meeting.The cabinet added that most localities have moved to stabilise growth in line with its policy measures, which it said have increased the number of positive factors in the economy and enhanced market confidence.The cabinet said it had sent inspection teams to 12 provinces to ensure its recently unveiled policy measures were being implemented. More

The preference for temporary increases may be frustrating for workers struggling with a cost-of-living crisis but it will be welcomed by European Central Bank policymakers fearing a self-reinforcing spiral between wages and inflation.At 8%, inflation is so high that families are quickly losing their purchasing power, so it is only a matter of time before they ask for more pay, emboldened by record-low unemployment and labour scarcity that is increasingly painful for businesses. Spending their extra cash would in turn fuel even more inflation, just as the ECB tries to bring it back down to 2%.Employers are meanwhile trying to resist big pay rises as they see the war in Ukraine curb economic growth and cling on to hopes that the current, energy-fuelled spike in inflation will prove temporary. On the surface, data seems to indicate that employers and the ECB are slowly but surely losing that battle: negotiated wages rose by 2.8% in the first quarter. This was their fastest pace since early 2009, driven by a 4% rise in Germany, the biggest of the 19 economies that make up the euro zone. But once one-off payments are excluded, the German increase was only around 2%, suggesting firms paid up to ease the pain of inflation and the pandemic for their employees, but in a limited way that should not perpetuate inflation. There is evidence that firms from Italy to France and the Netherlands are taking similar steps, mitigating what is still likely to become a difficult-to-contain surge in wages. Around 15,000 workers at Amsterdam’s Schiphol airport are getting an extra 5.25 euros per hour over the summer to alleviate crippling staff shortages that forced airlines to cancel hundreds of flights this spring.In France, President Emmanuel Macron’s government is actively encouraging firms to give employees inflation relief with a variety of tax-free bonuses, such as extra cash to help pay for transport to work.  And in Italy, where wage growth is still muted, some firms are paying sizeable one-off bonuses as a way of compensating for inflation and heading off demands for salary increases.Eyeware maker Luxottica recently offered workers a hefty pre-tax bonus of 3,800 euros, and its smaller peer De Rigo gave employees earning below 40,000 per year a bonus of 1,000 euros.     Other prominent Italian companies adopting the same strategy include footwear company Geox and brake-maker Brembo.”Employers have dug in and don’t want to reopen negotiations,” Boris Plazzi, a wage negotiator at French union CGT said. “Workers have therefore stood down and become resigned.”German union IG Metall made headlines last month by demanding an 8.2% pay increase for steel workers but employers rejected the demand, instead offering a one-off payment and possibly triggering a strike.The Ukraine war is another factor holding back wage growth, as a murky outlook and growing talk of a possible recession makes people fear for their jobs.”In the upcoming wage negotiations, uncertainty about economic development and concerns about possible job losses could dampen wage increases,” the German central bank said. MATTER OF TIMEBut barring a sharp deceleration of the economy, a pick up in euro wage growth is only a matter of time, with planned new European Union minimum wage rules likely to speed it up.Unemployment has never been lower while employment is near record highs – Germany alone has a shortage of 558,000 workers, according to the German Economic Institute. Staff shortages are most acute in the services sector, particularly tourism, where workers were laid off during the pandemic and firms are now struggling to replace labour.”In the hotel and catering sector, higher wages are going to be offered due to the lack of workers,” Ignacio Conde-Ruiz, economics professor at Complutense University in Madrid said about the Spanish economy.”However a more structural solution, such as hiring foreign workers, is needed.”The ECB has long argued that wage growth of 2% to 3% is consistent with a 2% inflation rate, its medium term target.Few are predicting that wages will accelerate far beyond this range, especially since the bloc’s sluggish southern economies will offset quicker growth in countries like the Netherlands, Belgium and Germany. But there is also a growing risk that persistent inflation will eventually empower unions to start demanding bigger payouts. “We expect further increases in the coming quarters, but not enough to compensate for inflation, leading to sharply negative real wage growth,” Morgan Stanley (NYSE:MS) said. “Accelerating nominal wage growth should nonetheless support core-driven inflation further out, and make services the key driver of our 2023 forecast.” More