Throughout the two decades prior to our tumultuous year of 2022, the inflation rate in the European Union (EU) averaged around its Central Bank benchmark-target of 2%, reaching, no more than two months ago, a staggering record-high of 11.5%. Largely unaccustomed to a persistent inflationary environment, European policymakers are currently grappling with yet one of the harshest periods in EU’s recent history. These troubling times of macroeconomic insecurity and instability, commonly dubbed ‘permacrisis’, threaten not only our collective welfare through weakened growth prospects, but also the peaceful status-quo that has characterised the continent in the post-war era. It is with these pressing, salient issues in mind that the present article humbly attempts to provide an overview of the unfolding crisis fuelled by elevated prices, a cost-of-living crisis, energy market fluctuations, and perilous geopolitical dynamics.
Figure 1: evolution of the main components of annual inflation in the Euro area (Source: Eurostat)
Lo and behold! Price tags tell painful stories: underlying causes behind high inflation
Quantified either aggregately as the increase in the general price level (via the GDP deflator) or specifically as the change in the typical consumption basket’s value (via the CPI), inflation undermines the living standards of all households in the EU. A complex and dynamic phenomenon, today’s inflationary storm stems from a multitude of interrelated, mutually reinforcing factors, ranging from soaring energy, food, and transportation costs to low unemployment, fiscal lavishness, and geopolitical volatility.
On the commodity market’s side, extreme weather conditions compromised the agricultural sector, sending food prices skywards. Similarly, surging prices for energy-based products and services have been driven by historic-low underground reserves of gas followed by diminished hydroelectric power generation and unusable nuclear plants shut-down for maintenance repairs. Moreover, Russia’s invasion of Ukraine caused major bottlenecks in the regional export routes of wheat, worsening the food accessibility and availability emergency. Further, stringent sanctions imposed by the EU against one of the largest crude suppliers coupled with the latter’s strategic weaponization of fossil fuel trade amplified the negative shocks suffered by energy markets, resulting in a far-reaching crisis deeply felt across consumers and producers alike. With high inflation and negative expectations, uncertainty has ensued, dampening the overall level of confidence in the economy.
Oil, bread, and guns aside, the double-digit headline inflation comes about during a phase of hard-boiled post-pandemic recovery, which created a dramatic wedge between the booming demand and an outstripped, flagging supply chain. Excessive government spending, predicated on generous fiscal stimuli and extensive support schemes, together with the post-Covid monetary expansion overheated European economies, sowing the seeds of today’s unprecedented inflation.
Lastly, the low-unemployment observed on ultra-tight labour markets - marked by early retirement waves and worker scarcity - has added to the inflationary momentum through a dangerous wage-price spiral. Accordingly, experiencing sudden drops in real wages, employees forced companies to increase salaries through bargaining, strikes, and unionised protests. Employers have since acquiesced in the demands and ended up with higher costs ultimately passed on to consumers.
Clear the way for the guardian: policy responses implemented by European governments
In order to assuage ever-present inflationary forces, European central banking authorities have unanimously espoused a longer-horizon platform of sustained monetary contraction. The growth-restricting, tightening policies have encompassed gradual jumps in interest rates in an attempt to curb down inflation. Entrusted with a clear mandate of ensuring price stability, the European Central Bank (ECB) has been increasing rates at the “fastest pace ever, by 200 basis points in the last three policy meetings,” as of November 2022 (Christine Lagarde). Committed to its cause of avoiding the entrenchment of self-fulfilling inflation expectations and of bringing the inflation rate closer to its medium-term target of 2%, the ECB reiterated through repeated public announcements its mission of accommodating the pursued monetary instruments to the evolving economic contingencies. The overarching purpose of ECB’s strategy lies in fostering more diffused social trust in EU’s resilience to external shocks by reassuring citizens that necessary steps are taken to alleviate imminent downturns.
When it comes to state policymaking, European governments have immediately responded to the initially excruciating energy inflation with a versatile mix of short-term fiscal measures. Hence, to insulate their citizens from the prolonged exposure to unaffordable, inflated utilities, EU member states resorted to electricity VAT cuts, rebates on energy bills, price capping mechanisms, and taxes on windfall profits reported by energy companies. For lower-income households and vulnerable demographic segments of the population, governments have devised means-tested lump-sum transfers and temporary redistributive welfare programs to prevent deepened social inequalities through energy poverty. In short, to cope with their proportionally higher energy expenditures, individuals in the bottom income percentiles have benefited from extended assistance. However, such emergency interventions are not meant to be permanent - policymakers must rely on structural reforms to reduce dependence on Russian fossil fuels and advance the green transition towards renewables.
Hard to see the light at the end of the tunnel on foggy nights: long-lasting impact of inflation
Despite the proactive policy interventions to mitigate protracted periods of rising inflation and stalled progress, today’s multifarious crisis has left a deep mark on the aggregate social wellbeing within the EU. Besides rises in precautionary saving rates along with drops in private consumption among certain households, high inflation, for as long as it thrives, keeps eroding people’s purchasing power and stirring social unrest. The heightened political volatility caused by widespread civil turmoil will continuously undermine European social cohesion and pose even greater challenges to the continent’s Union; especially considering the differential impact of inflation across member states, with the Baltics and fellow Easterners experiencing nearly double the Eurozone’s rates. The heavy inflationary toll translated as aggravated material deprivation, social exclusion and higher risk of poverty for the already worst off stratum of our society.
Figure 2: expected change in the share of population experiencing material and social deprivation as a result of persistently high inflation (Source: Joint Research Center of the European Commission)
Figure 3: expected change in the share of population experiencing absolute monetary poverty as a result of persistently high inflation (Source: Joint Research Center of the European Commission)
Doing justice to Jean Monnet’s vision of Europe: how to forge a European identity
In spite of today’s cynical Realpolitik looming over Europe, the forefathers of the Union have always held a strong belief in liberal internationalism and in an unremitting cooperation for continental peace and security. Geopolitical assertiveness, aggressive statecraft, and hegemonic clashes for power are no longer a permanent reality. The history of progressive European integration doubtlessly confirms that, with a unified vision and unhampered inter-state collaboration, European countries can come together and overcome dangers that seem to shake their foundations. Notwithstanding its internal frictions and public criticism over time, the EU has proved that there are durable gains from interdependence and convergence. European solidarity must never wither away. In the words of the great French diplomat and staunch defender of European unity Jean Monnet, “Europe will be forged in crises and will be the sum of the solutions adopted for those crises.”
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European Foundation for the Improvement of Living and Working Conditions, “Energy poverty looms as cost of living increases: Data behind the difficulties,” Eurofound, August 3, 2022.
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———. 2022b. “The Great Inflation of the 1500s Is Echoing Eerily Today.” December 20, 2022.
———. 2022c. “2022 Has Been a Year of Brutal Inflation.” December 21, 2022.