Inflation readings in the eurozone have been rising steadily over the past few months. This means that European citizens are feeling more stressed about their finances.
The rise in inflation — it reached 8.6% in June — has been led by a dramatic surge in energy prices which has also impacted other essential goods and services including foods.
Governments have tried to ease the financial burden for households by handing out energy checks or freezing electricity prices while the European Central Bank (ECB) — whose mandate is to keep inflation to around 2% — has upped its interest rates for the first time in 11 years.
The worst is yet to come. Russia has severely cut gas supplies to the European Union, potentially threatening their ability to provide enough gas to weather the winter. In order to maximize their chances, member states have committed to reducing their gas consumption in the coming months.
How did Europe get to this point? What can it do to break the inflationary cycle? During a July 28th debate, we asked these questions to a panel made up of experts.
These are the key takeaways.
What brought us here?
Vicky Pryce (Centre for Economics and Business Research Chief Economic Advisor) said the current situation was the result of a “perfect Storm” that began during the COVID-19 pandemic. Governments pumped large amounts into their economies in order to boost them while businesses were hit hard by supply chain disruptions and labour shortages.
However, restrictions were removed and “all that pent up demand led to quite an substantial pickup in prices which was happening through 2021”, she said. She added that just as prices were beginning to plateau with supply chains constraints finally starting to ease, Russia’s war in Ukraine threw a wrench into the world economy.
She stated that this has “completely upset any forecasts on inflation made by the central bank because, ofcourse, gas prices and oil prices, as well as food prices all went higher to a very large extent, in some instances going up five times like the gas price and other months.”
Can the ECB combat this inflationary pressure
The ECB responded in a drastic move to raise its interest rates in response to rising inflation. This was something that it hadn’t done for over a decade.
“That was a good sign,” said Michiel Hoogeveen, a Dutch member of the European Parliament from the European Conservatives and Reformists Group.
He said, “But, it wasn’t too late, unfortunately.”
“If we look at certain countries within the eurozone, some member states, they still aren’t reforming their economies. They have not implemented the necessary austerity measures that were required after the euro crisis. We are now seeing that the eurozone is populated with countries with high levels of public debt, which we must compensate with new instruments.
Pryce, a former Joint Head for the UK Government Economics Service believes that the ECB is “in a very very difficult situation right now.”
There are concerns that raising rates could lead to a slowdown in growth which could have worse consequences for everyone.
What should governments do?
Russia’s ongoing war against Ukraine has shown how dependent Europe is on the Kremlin to supply its energy needs, and how vulnerable it can be to price fluctuations.
It is therefore essential to make the economy more sustainable. This starts with more green energy.
Colm Markey, an Irish member from the European People’s Party, said that “it’s a bit missed opportunity in the past couple of years that investment was not chosen about a transformation to energy sustainable future.”
“Because energy is my pinch point. When it comes to food, energy represents the pinch point. However, when it comes transport, energy is the pinch.
“The bigger opportunity is that we need to invest in a way that helps us transition to a more sustainable energy situation where we’re, for example, scaling up renewable energies. He said that he sees huge potential in offshore wind and other things, which could give them a major advantage in the current economic situation.
Monique Goyens (Director-General of The European Consumer Organisation) also called for investments into energy-efficient housing, renewables, and other measures. She described this as a “social measure” since it can help people get out of energy poverty.
You can help them get out of poverty by retrofitting their homes or renovating them to lower their energy bills. She said that they don’t have to choose between energy and food.
However, in the immediate future, national authorities should concentrate on helping the most vulnerable and “engage with an unequal policy meaning positive discrimination for the less affluent households.”
This would require governments not to give hand-outs to households with short-term financial needs but to focus financial assistance on less-affluent households.
How can consumers lower their bills?
Goyens stressed that there is a huge potential to save costs for people. If you look at energy and the way people use it, there are many things that can be done immediately with no cost.
She recommended defrosting fridges and freezers, as well as switching off appliances completely, rather than leaving them on standby.
Additionally, behaviours that people developed during COVID-19 lockdowns because of uncertainty over how the job market and the overall economy would be impacted should return to the fore, said Kevin Mountford, the co-founder of Raisin UK, a marketplace that connects consumers and institutions to banks with top savings rates.
He flagged that the average UK household saved £100 (€119) a week during the various lockdowns because of behavioural changes.
“I believe some of that discipline needs to be restored. We can be smarter and more efficient. I can see my house and switch off the lights in a way that I have never done before. He said that smart metres are what we have.
“I don’t think I’ve ever looked at these things before, but now I’m looking at kind of usage. He also stated that he was always paying attention to his fuel. “So I believe we can all improve our behavior.”
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