After Declaring That Inflation Was Only “Temporary,“ the European Central Bank Now Denies That Stagflation Is Likely
The Frankfurt-based central bank stated in a report released on Tuesday that it does not think the area will experience stagflation, which occurs when high inflation is combined with slow economic growth and high unemployment, like it did in the 1970s.
Stagflation, according to the ECB, is defined as inflation that occurs when the “price stability objective of two percent” is met along with zero or negative growth for at least two years. The ECB predicted that the current economic situation would need to persist through the end of 2023.
The central bankers projected that inflation would drop below the two percent level by the end of the year and that the eurozone would avoid a full recession, but they also noted that forecasts for growth and inflation have become much less reliable recently.
According to the researchers, there are big differences between the economies of today and the 1970s, when OPEC nations’ oil embargo and other factors drove America and Europe into stagflation. As major reasons for optimism for the future, the report cited the economy’s significantly lower unionization and decreased reliance on oil.
Although the EU has decreased its reliance on oil, the bloc remains largely dependent on Russian natural gas as a result of decades of fruitless attempts to switch to so-called green energy.
In fact, Fatih Birol, the head of the International Energy Agency, warned European leaders on Wednesday to get ready in case Russia completely cuts off its gas exports by the winter. He urged European nations like Germany to keep operating its nuclear power plants, which the nation has vowed to shut down by the end of the year.
Germany, the economic engine of the EU, has already been compelled to humiliatingly increase coal production and ration natural gas. Germany is among the nations in Europe that have issued warnings about the possibility of gas rationing, raising the threat of devastating recessions.
The World Bank issued a warning of widespread stagflation akin to that of the 1970s earlier this month, citing China and the European Union as the areas most likely to experience stagflation as a result of the coronavirus lockdowns and the conflict in Ukraine.
Leading economists are becoming increasingly worried that President Joe Biden will lead the United States into the stagflation trap, which would undoubtedly affect the outlook for the rest of the world’s economies, including the eurozone.
After being forced to acknowledge that its earlier forecast of “temporary” inflation was inaccurate, the ECB now predicts that Europe will avoid a period of stagflation. In recent weeks, similar predictions made by the Bank of England and Janet Yellen, the former head of the Federal Reserve who is now the Treasury Secretary, have also been retracted.