Every week, Moritz Koch, head of the Handelsblatt office in Brussels, analyzes trends and conflicts, regulatory projects and strategic concepts from the inner workings of the EU. Because anyone interested in business needs to know what’s going on in Brussels. You can reach him at [email protected].
European semester – that sounds like student fun after deprived zoom seminars. But it means something else. The European Semester is the technical term for the EU’s efforts to coordinate the economic policies of the member states and to initiate reform initiatives. The Commission intends to present its recommendations for the Member States at the end of May. Working on it has seldom been as demanding as it is now.
The director of the International Monetary Fund, Kristalina Georgieva, described the pandemic as a “crisis like no other”. That description still applies. On the arduous way out of the corona recession, Europe is groping through uncharted economic territory. Yes, demand is recovering, people are spending money, eating out or going to the cinema again – despite Omikron.
But at the same time the offer remains limited. Goods are not being delivered because containers are piling up in ports, there are bottlenecks in chip production, and energy is becoming more and more expensive. That drives the prices. The unprecedented crisis is followed by inflation like no other.
Christine Lagarde, head of the European Central Bank (ECB), tries to calm people down: “Inflation is not out of control.” The problem for the central bank: it has lost credibility because it greatly underestimated the rise in prices last year. Goods and services in the euro area have recently increased in price by five percent. In Germany even more.
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What Lagarde wants to emphasize is that in the euro zone, unlike in the US, there is still no sign of a wage-price spiral. In America, rising prices drive up wages and rising wages drive up prices: inflation feeds itself. This is probably not the case in Europe yet. But that’s the thing with control. You have them – until you suddenly don’t have them anymore.
Politics decides on the price level
The expectation of the ECB is that the surge in inflation will subside this year. But a serious prediction is hardly possible. Currently, it is not the market that decides on the price level, but politics. In the middle of winter, Russia is holding back gas supplies to Europe to build pressure.
If the Russian army invades Ukraine and the West carries out its threat of sanctions, there is a risk of an energy price shock not seen in Europe since the oil crises of the 1970s. The situation in China can also deteriorate at any time. There, the highly contagious omicron variant encounters inadequate vaccination protection, a rigid zero-Covid policy in which entire cities are sealed off, and supply chains that are already fragile.
What we are seeing are geopolitical prices. It would be a mistake to leave the reaction to this to the ECB alone. Interest rate decisions can neither resolve supply bottlenecks nor encourage Russia to supply more gas.
The situation demands a strategic response. Reducing dependencies, opening up alternative energy sources, bringing more chip factories to Europe – Europeans urgently need to step up these efforts. And that is what the deliberations in the European Semester should also focus on.
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