The European Central Bank's (ECB) decision to keep interest rates at their record high levels on Thursday (January 26) has raised fears about its impact on Germany, as the country faces increasing signs of a decline in manufacturing amid a slump in manufacturing and falling business confidence shows weakness.
The ECB raised interest rates 10 times in a row between July 2022 and September 2023 after Russia's invasion of Ukraine pushed up prices across Europe and raised the key deposit facility rate from -0.5% to 4.0% . Easing price pressures prompted the bank to pause on rate hikes at its two previous meetings in October and December.
The bank's decision also came a day after the Ifo Institute, a Munich-based think tank, downgraded its 2024 GDP forecasts for Germany, the euro zone's largest economy, to 0.7% from 0.9%. Last week, the federal Statistical Office reported that the German economy shrank by 0.3% last year.
Rasmus Andresen (Greens/EFA), a German member of the European Parliament's Economic and Monetary Affairs Committee and rapporteur for the Parliament's annual report on the ECB in 2022, condemned the ECB's decision as “very damaging”, although it was widely expected .
“We all know that if the German economy is sick, then the European economy is also sick, because Germany plays a pretty dominant economic role in Europe,” Andresen told Euractiv.
“I think that [the decision is mistaken] “particularly at a time when Europe's largest economy is in recession, and also at a time when we need much more private and public investment to transform our economy into a greener future,” he added.
According to the latest figures from EurostatAccording to the EU's official statistics office, inflation was 2.9% year-on-year in December: an increase on November's rate of 2.4%, but well below the peak rate of 10.6% reached in October 2022. The ECB's target rate is 2%.
“Looks pretty bad.”
Andresen's comments were confirmed by Sander Tordoir, a senior economist at the Center for European Reform, told Euractiv that “most of the data suggests that the ECB should cut rates aggressively and fairly soon,” although he did not expect the ECB to actually cut rates ” “before April or June”.
Tordoir also referred to studies – including those from ECB itself – suggesting that inflation in the eurozone, unlike the US, is largely driven by supply rather than demand.
“The eurozone was basically unlucky and was hit very hard not only by the pandemic supply shock, but also by the supply shocks from the Russian invasion of Ukraine,” he said.
“And the weakness in Europe lies primarily in France and Germany. So it is the heart of the Eurozone economy. Germany has been weaker for a long time. The recent weak economic indicators in France also look pretty bad,” he added.
The EU economy is still grappling with the long tail of the 2022 energy shock
Although gas and electricity prices have fallen below their peak in 2022, they are not expected to return to pre-pandemic levels any time soon, the European Commission said on Monday (Jan 15), warning of long-term economic concerns Consequences of high energy prices on the competitiveness of the EU.
“A necessary sacrifice”
However, Philipp Lausberg, analyst at the European Policy Center (EPC), stressed that the ECB's main mandate is to keep inflation at 2% and that the ECB likely sees the poor performance of the German economy as a “necessary sacrifice” in order for this to happen happens.
He also pointed out that Germany itself was among the EU countries that initially favored an inflation-focused euro zone central bank.
“The Germans are most behind this concept of an independent central bank,” he said. “It was founded on the model of the Bundesbank, which used this policy quite successfully in the post-war period.”
“Of course there have always been member states that would have liked to have had a much more politically active ECB, one that was more actively committed to growth and job creation. But that is not the DNA of this institution. I wouldn’t expect that.”
The ECB's decision also came despite growing pressure from European workers on the bank to cut interest rates as quickly as possible.
Earlier this week, Esther Lynch, the general secretary of the European Trade Union Confederation (ETUC), which represents 45 million workers across Europe, said: told Euractiv explained that the ECB's tight policies “put unnecessary financial pressure on working people” and “risk driving the economy into a job-killing recession.”
Fears of a possible recession were further confirmedn Friday (January 26th) when the ifo Institute reported that German export expectations fell in January, including in core manufacturing industries such as automobile manufacturers and manufacturers of machinery, equipment and electrical equipment.
[Edited by Nathalie Weatherald]
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