The specter of recession looms in Brussels. The European Commissioner for the Economy, Paolo Gentiloni, announced this Monday after the Eurogroup a “contraction in economic activity for the coming months.” Of course, Gentiloni hopes that the euro zone can recover later: “The economy is slowing down and a contraction is coming at least during the winter months. If we think about the frequency and economic sentiment indicators, what we see is that there are many signs of contraction in economic activity for the coming winter, for the coming months. It’s something we have to work on. We have to try to maintain positive figures for next year”.
In this sense, the Italian commissioner has clung to the good unemployment figures, which contrast with the bad inflation: “At this time the very good news continues to be the labor market.”
Already in September, the “pessimistic” scenario of the ECB projected -0.9% of GDP for 2023%, and last week, the president of the entity, Christine Lagarde, assumed that she considered a recession, although she downplayed it because she considered it smooth. After the ECB’s second consecutive 75 basis point hike in interest rates, Lagarde said last Thursday: “We don’t think this recession will be able to tame inflation.”
Gentiloni, who will present the European Commission’s autumn economic forecasts next Friday, has also referred to the public efforts that countries are making to counteract the energy crisis and its consequences for homes and businesses: “What we see in 2022 is a significant fiscal impulse, around 2% of GDP, directed above all at measures aimed at mitigating the price of energy, around 1.25%. This fiscal expansion, which is important, can reinforce inflationary pressures, and that is something we do not want. But we know that intervening and responding to this situation is necessary.” The latest data from Eurostat points to growth of 0.2% in the third quarter and inflation of 10.7% in October in the euro zone.
Thus, Gentiloni has stated: “Between all of us, we have to achieve three things. First, that the measures are affordable from the fiscal point of view; second, that they be measures aimed at the most vulnerable; and, thirdly, that they maintain the price signals”.
According to Brussels calculations, “most of the aid measures, around 70%, are applied to the whole world or to a majority of the population, without being targeted, which is progress if we compare it with the same estimates which we did a few weeks ago. But I believe that progress can still be made, despite the fact that we are aware that targeting is not always easy from a political and technical point of view, especially when one has to react very quickly. We have to work together to improve our results, not least because the price of energy is likely to remain high in the future. We ask for specific measures, we have to do more if we want to avoid fiscal problems in the coming year. Caution does not mean not adopting measures aimed at the energy emergency, from a very prudent fiscal attitude there may be exceptions for support measures related to the energy emergency”.
Economic Vice President Valdis Dombrovskis added: “We are going to publish the economic economic forecast on November 11. It will confirm the slowdown in the economy, the weakening of the economy along with high inflation. As far as the budget response is concerned, it is a tricky mix of policies, because fiscal policy and monetary policy should not work at opposite ends. Therefore, we do not recommend a broad-based fiscal stimulus, but rather a more cautious fiscal approach with temporary and targeted support measures. Regarding the support measures, we have also made an assessment of how temporary and specific the support measures taken by the Member States are and, unfortunately, most of those measures are not specific. So we will discuss how to do it in a more specific way.”
“I cannot previously announce figures and details of the autumn economic forecasts, in a few days we will publish the forecast. I can give you this qualitative assessment that it will indicate a further weakening of the economy and confirm high inflation,” said the Latvian: “As far as inflation is concerned, we expect it to follow a downward path, first because energy prices have reached its peak. And also because we are taking a series of measures that intervene in the energy market, so that energy prices slow down. And also, the European Central Bank is doing its job in terms of monetary policy response. That is why it is important that fiscal policy does not contradict these efforts to maintain a prudent fiscal policy”.
“I think we are at a time when we have to get it right”, said the Spanish first vice-president, Nadia Calviño: “The European Central Bank, the different governments, we have to articulate our economic policies well to guarantee that we control inflation without putting economic growth and job creation are at risk. Fortunately, the data for our country point to a significant drop in inflation in October. We are talking about inflation around 7%. We expect it to remain around this level in the coming months and resume its downward path in 2023, and all this in a context of strong economic growth and job creation. The data for October in the labor market also confirm the good performance of the labor market in Spain, with more than 100,000 new Social Security affiliates. Historical minimum levels of the unemployment rate, of the youth unemployment rate, of the temporary employment rate. All this indicates that the Spanish economy continues to have strong growth, with job creation and better quality employment. This has to be our path, that of continuing to contain inflation, correcting our fiscal imbalances, reducing the deficit and the public debt in relation to GDP and in an environment of economic growth and job creation that allows us, therefore, to continue generating prosperity for all citizens.
French Economy Minister Bruno Le Maire added: “Our main topic remains inflation and rising prices in the euro zone and throughout Europe. Inflation weighs on our citizens and our businesses. Our strategic objective must be to return to a lower level of inflation in Europe as soon as possible. There must be perfect coordination between the monetary policy carried out by the European Central Bank and the budgetary policies of the Member States. We must also ensure that there is perfect coordination between the budgetary policies of the Member States and that they all strictly and rigorously respect the common framework that the European Commission has defined in terms of State aid to support our companies”.
Regarding fiscal rules, on which Brussels will present a proposal this Wednesday, the French minister said: “We want common rules, we want state responsibility and we want to maintain investment opportunities, because obviously there cannot be a united and strong monetary area without common rules respected by the 19 member states and rules that are controlled. Feel responsible for getting out of debt and return to the common rules. And I think it is a good policy to let the States take charge of this reduction of the debt and the return to the health of the public finances”.
The German Finance Minister, Christian Lindner, has pointed out: “The sustainable financing of the States and the reduction of the debt and the new indebtedness in the medium term is crucial so that the fiscal policy of the State does not counteract the monetary policy of the ECB. And with this common understanding, we look forward to continuing to shape Europe’s response to inflation. We are in an inflationary situation, in a common monetary union. Rules are important. Together we must embark on the path back to sound public finances. Everyone is currently doing a lot of debt. But it is crucial for the credibility of the currency union that everyone shows the way out.”