Europe Faces A Fragile Economy As The Merkel Era Ends

As Angela Merkel prepares her exit from the chancellery in Berlin, a false alarm is ringing in Europe about an imminent danger of “stagflation.” This phenomenon, like dragons, belongs to mythology rather than real historical or present circumstances. 

The noise will prevent any faint alarm being heard about the true danger of post-Merkel monetary deluge in Europe—a French and Italian debt crisis culminating in euro collapse. 

The stagflation myth originates from the 1970s experience in the US. Data averages collected over the period as a whole (1973–80)—including a virulent monetary inflation and economic boom (1976–78) sandwiched between two recessions featuring energy supply shocks—show high Consumer Price Index (CPI) inflation accompanying real economic sluggishness.

 crowd walking and sitting in front of gray concrete building during daytime

Photo by Angelo Abear on Unsplash

Fast-forward to the present: European CPI inflation has been climbing through the year (3 percent year on year in September), albeit staying below US comparisons in part because of a low or zero weight for housing and secondhand cars. Yet real economic performance in Europe has been seriously subpar if we correct for optical illusions related to the end of lockdowns and a receding pandemic.

Now an actual and looming crisis of natural gas supplies in Europe (amid forecasts of Russian supply shortages and domestic production curbed by environmental policy) could mean consumers in some countries facing a doubling of bills and also disruption. Russian president Vladimir Putin, with the Nord Stream 2 pipeline to Germany now complete, could make the crisis much worse for eastern and southern Europe. Some experts suspect Gazprom is already manipulating gas prices.

This gas crisis comes on top of worsening bottleneck problems in the global economy. The whisper number for euro area CPI this winter is around 5 percent year on year. Meanwhile the outlook for economic rebound from the pandemic crisis is souring. Among the large European countries, only Germany this autumn is back to eve-of-pandemic GDP levels.

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