via Shaun Richards
Even in what are grim times we are allowed a wry smile and that happened when I spotted this last night.
ECB’s Lagarde: We Are Not At All In A Situation Of Stagflation. ( @LiveSquawk)
I pointed out on social media that this was a case of never believe anything until it is officially denied. That phrase does have a European link as I believe it was Otto von Bismarck who first used it. It did not take long as this morning the ECB Vice-President has been speaking and as you can see he has said that they face stagflation.
ECB’s Guindos: Price Risks Skewed To Upside, Growth To Downside. ( @LiveSquawk)
If we break that down a little then we see that the stag part is there because growth was not that great anyway. as you can see below from the European Commission autumn forecast.
Altogether, this forecast projects real GDP to grow by 1.4% in the EU in 2025 and 2026, edging up to 1.5% in 2027. The euro area is expected to broadly mirror this trend, with real GDP growing by 1.3% in 2025, 1.2% in 2026, and by 1.4% in 2027.
As you can see a downwards nudge to 2026 puts it below 1% which is definitely the stag part and the energy price rises will supply the inflation.
A more aggressive view was given earlier today by the head of the central bank of Slovakia.
Not only did
signal a strong ECB hawkish bias, but he said that every meeting should be alive after March. *ECB’S KAZIMIR SAYS RATE HIKE ON IRAN MAY BE CLOSER THAN THOUGHT “I don’t want to speculate about April or June. But we will be ready to act if needed.” ( @fwred )
As you can see he is already thinking about interest-rate increases in response to the rise in inflation that is on its way.
At this point Euro area taxpayers would no doubt vote for these people to shut up as these open mouth operations just create headlines and create confusion.
Inflation
This is an issue in terms of a complete change for the ECB and let me illustrate via the February press conference.
I just want to take you back to the undershooting. We have projected undershooting in 2026 for a long time. And if you go back to our September projections, for instance, which were the last projections conducted by the ECB, we had actually this 1.7%, for the entire year.
This allowed President Lagarde to do some crowing and the emphasis is mine.
On your first question, I would like to mention that our monetary policy is in good shape. And it’s in good shape because it is agile and it is prepared to do what is necessary in order to reach our medium-term 2% target in a symmetric way, as we decided in our strategy assessment determination back in July 2025.
We can agree that it is agile when it comes to cutting interest-rates but raising them is another matter which contradicts the claims of symmetry. Plus there is the record of 2021/22 when President Lagarde dismissed the rise in inflation as a “hump” and promised not to raise interest-rates before being forced into an embarrassing U-Turn.
As to higher inflation let us start with her friend European Commission President von der Leyen from earlier.
Just to give you an example: since the beginning of the conflict, gas prices have risen by 50% and oil prices by 27%. If you translate that into euros – 10 days of war have already cost European taxpayers an additional EUR 3 billion in fossil fuels imports. That is the price of our dependency.
Along the way she inadvertently confesses that the policies she supports have raised European energy bills.
The cost of the energy itself, which makes up more than 56% of the bill. Grid charges 18%. Taxes and levies 15%. And carbon costs, on average around 11%.
The exact impact is unclear because the price of oil and gas has been so volatile this week already. But as long as the war lasts it will be higher and will feed into inflation in other areas such as food prices which remain inflated from the last burst.
Along the way we have another confirmation of my critique of the concept of core inflation. From the February ECB press conference.
My second question is on core inflation, which has fallen to, I think, the lowest level since October 2021 and is also below the ECB’s first-quarter forecast. Does the Governing Council see this as a good development, as it suggests inflation is coming down further and quicker than potentially expected?
How is using it as a guide working out? This keeps happening…
Economic Growth
This is an ongoing problem for the Euro area which was officially acknowledged by the speech given by Isabel Schabel of the ECB on February 19th 2024.
Between 1995 and 2007, annual growth in GDP per hour surged measurably in the United States, whereas it slowed and diverged in the euro area.
There was then the Draghi Review supposedly to put things right and in the February press conference the open mouth operations continued.
As you probably know, the leaders are meeting in a week’s time to examine competitiveness reforms and hopefully to accelerate the process.
As you can see nothing much has happened which you could see from the growth forecasts I looked at earlier. That is in spite of the AI word salad we received.
which I think we have to be a bit more granular about because it’s AI-related but it’s everything having to do with AI. So it’s not just AI: it’s AI, it’s the infrastructure that comes with it, so construction of data centres in the pipeline and going through the process of licensing and authorisation, it’s software, it’s hardware, it’s a lot of investment that is coming out of that particular segment.
Energy Problems
This is the crux of so many of the issues above. If we go back to the Isabel Schnabel speech there was this.
Today, electricity prices in the industrial sector in the EU are almost three times as high as in the United States and more than twice as high as in China.
Now President von der Leyen from this morning.
Let me give one figure: last year, we installed more than 80 gigawatts of renewables in the EU – a record! But six times more renewable energy does not get access to the grids. With electricity demand set to increase, this is simply not sustainable.
As you can see this inefficiency is bad for both economic growth and inflation as ever more money is spent on unreliable sources of energy. But she is partly responsible for something even worse as she voted for the end of nuclear power in Germany which according to JP Morgan did this.
“JPMorgan estimates that, had Germany not phased out nuclear power, the country would have generated 50% less electricity from fossil fuels and 84% less electricity from natural gas in 2024. Electricity prices in Germany would have been around 25% lower, and the country would have imported half as much electricity..”
Now she claims to be keen on nuclear power except with the lead times for new stations this may not even help in the 2030s.
Comment
If one looks back one can easily argue that the Euro area has been in stagflation for some time. Even worse that a significant driver of it has been the energy policy it has pursued which has been both very expensive and ineffective. You do not have to take my word for it as here is Ursula von der Leyen from earlier.
we are vulnerable and dependent
A major factor in that was the German shift away from nuclear power to in effect depend on Russian gas which she supported.
Now there is a list of problems.
TRADERS BOOST BETS ON ECB RATE HIKE BY JUNE, PRICE 60% CHANCE. (@FirstSquawk)
So on Monday we were expecting two interest-rate rises, yesterday none and today you can see!
Let me finish by reminding you of the fiscal issue I analysed yesterday as stagflation only adds to that.