The eurozone is in the grip of a record high inflation crisis, as prices spiral out of control for the sixth month in a row. This is putting pressure on the European Central Bank (ECB) to take drastic action, as consumers and businesses struggle with the increasing cost of living.
Vice President Luis de Guindos tried to reassure lawmakers over rising prices on Thursday, saying the eurozone is close to reaching peak inflation. The central bank sees price pressures diminishing in the second half of this year, although energy costs are expected to keep inflation relatively high. But many economists are not convinced by these assurances and believe that the ECB will have to act soon if it wants to avoid an all-out meltdown.
Prices are currently rising at an annual rate of 7.5%, well above the ECB’s target of 2%. This is causing enormous problems for people across Europe, who are struggling to make ends meet in an increasingly expensive economy. Businesses are also feeling the strain, as they find themselves unable to compete with rivals from countries such as China and India. The ECB has already cut interest rates twice this year, but some analysts believe that it may have to go further and launch a full-blown quantitative easing program in order to bring inflation under control. Such a move would be hugely controversial, but there is growing pressure on policymakers to take whatever steps necessary to avert disaster.
The ongoing war in Ukraine is having a significant impact on Europe’s economy, with energy prices rising and some countries facing the risk of recession. Russia’s energy firm Gazprom has halted gas supplies to two EU nations, Hungary and Poland, for not paying for the commodity in rubles.
The move has sparked fears that other countries may also be cut off. Analysts at Gavekal, a financial research firm, said that if Gazprom were to also cut supplies to Germany, “the economic effects would be catastrophic.” In Italy, central bank estimates are pointing to a recession this year if Russia cuts all its energy supplies to the southern nation.
The inflation rate in Europe rose to 1.5% in April, up from 1.2% in March, largely due to rising energy prices. Energy prices were up 38% in April on an annual basis, compared to a 44.4% rise in March.
Europe is in a precarious position when it comes to its energy security. A large portion of the bloc’s gas imports come from Russia, and if Moscow were to reduce flows, it could have a significant impact on households and businesses.
Alfred Stern, CEO of OMV, one of Europe’s largest energy firms, told CNBC Friday that it would be almost impossible for the EU to find alternatives to Russian gas in the short term. “We should be rather clear: in the short run, it will be very difficult for Europe, if not impossible, to substitute the Russian gas flows. So, this can be a medium-to-long-term debate … but in the short run, I think we need to stay focused and make sure that we keep also European industry, and European households supplied with gas,” Stern said. Separate data also released Friday pointed to a GDP (gross domestic product) rate of 0.2% for the euro area in the first quarter.