An Analysis of the Low Growth Rates in the eurozone

Different growth rates in Eurozone

Jacobs elaborates on the low growth rate in the Eurozone. He states that, among others, Italy, Spain and France have shown low or stagnated growth rates. However, other Eurozone countries such as Germany have shown an increase in growth rate relative to the previous quarter. For the Netherlands, numbers for the last quarter are not yet available.

Why low growth rates?

There are several reasons for these low growth rates, the professor argues that all these reasons have one denominator: they are all related to the supply side of the economy. These include the war in Ukraine and the related sanctions, higher energy and food prices and the (still ongoing) strong COVID related measures in China.

Stagflation?

Before the war, economists feared for a wage-price spiral and an overheated economy. Now however, it is feared that we will experience stagflation: a stagnating economy with rising inflation. Professor Jacobs acknowledges this risk for the short run. But, he stresses that the inflation expectations are still not yet anchored at a higher level. This means that the risk for a wage-price spiral is still low since labour unions use inflation expectations for their wage negotiations.

What if inflation expectations rise?

The Central Bank assesses monetary policy on inflation expectations. The Central Bank tries to steer individuals’ expectations toward the inflation that the Central Bank has set as its target, ‘divine coincidence’.  If the Central Bank fails to succeed, the sole remedy is to reset individuals’ inflation expectations by raising the interest rate and tightening monetary policy.

Exchange rate dollar/euro

Jacobs briefly touches upon the higher dollar price the Eurozone faces. A dollar in terms of euros now costs approximately 1,05. In comparison, last year this was 1,22. This increase will lead to an even higher level of inflation in the eurozone since goods and services from the United States will be more expensive for us. In spite of that, this more expensive dollar also benefits the competitiveness of European businesses since our goods and services have become relatively less expensive for the United States.