Photo : REUTERS/Kai Pfaffenbach
05 February 2022, Saturday | NIAS Europe Daily Brief #117
IN FOCUS
By Padmashree Anandhan
Germany’s hike in inflation rate: What does it mean for the Eurozone?
On 06 January, the German Federal Statistical Office released preliminary data, Germany’s inflation rate was reported to be standing at 5.3 per cent, which will be the second time since the rate crossed the five per cent mark since the reunification.
On the same day, it also disclosed the 3.1 per cent increase in consumer prices in Germany for 2021, which marked the highest inflation rate since 1993.
On 03 February, the tighter restrictions to control the spread of the Omicron variant in January had an immediate effect on the service industry, impacting the economic growth of the Eurozone.
Driving factors of high inflation rates
First, rising energy prices. Once the pandemic restrictions were lifted in 2021, the demand for fuel and gas increased. OPEC instead of meeting the rising demand, restricted the full supply; it opted for a step-by-step increase to meet the fuel demands. As a result, the price of the limited supplies grew high.
Second, reduction of VAT and end of a temporary VAT cut. The VAT rate applies for two-thirds of the goods under the Harmonised Index of Consumer Prices (HICP). All energy-related, industrial, services, food, and drink come under HICP. With the reduction in VAT by 15 per cent the HICP inflation rate was expected to decrease by 1.8 per cent, but as per the recent data, the reduction in the inflation rate was lower than expected. The prices of food, non-energy industrial goods, and services fell only by a small margin. It was due to recovery methods opted by the industries over the losses incurred in the pandemic. With the VAT rate back to 19 per cent it is the end of the temporary VAT cut from 2021. The inflation will only push further above one per cent leading to 2.5 per cent increase by mid-year.
Third, choking the supply chain. The entire globe suffered as the supply chains stalled due to pandemic. Ships that were supposed to deliver manufactured, seasonal, and promotional goods never reached their destination due to constant lockdowns. As a result, the freight charges soared high, affecting supermarkets and the car industry. With a surge in the demands and shortage of supply, consumer prices increased. The chokepoints in the supply chain have specifically affected Germany mainly due to its nature, which is an “open and trade-integrated economy.”
Fourth, the other factors include the fall in mineral oil product prices, the introduction of CO2 pricing, and crisis-linked effects.
The Organisation for Economic Co-operation and Development (OECD) has recommended the country to be directly involved in increasing the real income of the poorer segment of people rather than engaging in VAT reduction strategies.
What does it mean for the Eurozone?
First, the inflation rates in Germany are expected to decrease by the second half of 2022. Still, the inflation in the Eurozone is bound to persist longer than in Germany, especially with the increase in energy rates. Although the European Central Bank ECB aims to keep the rate at two per cent, with the January lockdowns and shutdown of various services and industries, it might lead to hyperinflation.
Second, purchasing power will drastically reduce due to rising consumer prices, and people would choose between essential products to unaffordability. Due to this the consumers will become selective in spending their income on certain goods
Third, improved State response. Recently, Hungarian Prime Minister Viktor Orban addressed the inflation in consumer prices and used a national cap to level the prices of sugar, food, and dietary products. Another way, as suggested by economists, is to increase the income of those in need through welfare assistance, which can balance inflation.
Fourth, unequal recovery path. While Germany is going through a slowdown in economic recovery. Other countries in the Eurozone, such as France, Spain, and Italy, show a faster recovery. The difference is due to revenue from the tourism industry, less dependency on industrial exports and highest vaccination rates.
A short explanation on Inflation, Eurozone and HICP
Inflation - Inflation is the decline of purchasing power of a given currency over time.
Eurozone - Member States who have taken a step by replacing their national currencies with the single currency – the euro, form the euro area. Denmark and Sweden are yet to be part.
HICP - The Harmonised Index of Consumer Prices (HICP) is used to measure consumer price inflation internationally. That means the change over time in the prices of consumer goods and services purchased by euro area households.
Inflation target- The inflation target is defined as a medium-term average rather than as a rate (or band of rates) that must be held at all times. The inflation target is also, necessarily, forward-looking. This approach allows a role for monetary policy in dampening the fluctuations in output over the course of the cycle.
References:
Martin Arnold, “How Germany went from Europe’s economic locomotive to its laggard,” Financial Times, 27 January 2022
Aline Schuiling, “Global Daily – Impact of German VAT unwind on inflation,” ABN-AMRO, 07 January 2022
Michael Nienaber and Klaus Lauer, “German inflation eases in December for the first time in six months,” Reuters, 06 January 2022
“Germany: Annual inflation hits highest rate since 1993,” Deutsche Welle, 06 January 2022
IN BRIEF
By Joeana Cera Matthews and Ashwin Dhanabalan
ICELAND
Ban on whale hunting by 2024
On 04 February, Iceland announced to ban whale hunting within two years. Minister of Fisheries and Agriculture Svandis Svavarsdottir said: "Why should Iceland take the risk of keeping up whaling, which has not brought any economic gain, in order to sell a product for which there is hardly any demand?" There has been a drop in demand as Iceland's primary buyer of whale meat Japan had resumed commercial whaling in 2019. Other factors have also impacted the industry, such as social distancing rules in meat production facilities and the extension of a no-fishing coastal zone, which have shot up the price of whale hunting. ("Iceland whaling: Fisheries minister signals end from 2024," BBC, 04 February 2022)
MONTENEGRO
Government ousted via a no-confidence motion
On 04 February, the parliament of Montenegro approved a no-confidence motion toppling the government. Led by Prime Minister Zdravko Krivokapic, the vote ended with 43 in favour of the motion while 11 voted against it. The conservative pro-Serbian government which came into power in 2020, had only been in power for 14 months. Krivokapic has been blamed for mismanaging the pandemic, creating an economic slowdown and delaying the integration process. Opposition leaders commented on the ousting: “This is not the day to be triumphant. We have serious work ahead to bring Montenegro out of a crisis.” Montenegro’s President Milo Djukanovic is expected to nominate a prime minister-designate soon. (“Montenegro′s government toppled in no-confidence vote,” Deutsche Welle, 05 February 2022)
REGIONAL
Ukraine: Former Chancellor Merkel’s Security Advisor calls for increased weapons provision to Kyiv
On 04 February, Reuters reported former German Chancellor Angela Merkel’s Security Advisor Christoph Heusgen to have called on the country to increase its support for Ukraine. The future Chief of the Munich Security Conference, set to assume the post by 18 to 20 February, further stated that history could no longer be used as an excuse. Heusgen said: "We make it too easy on ourselves, to say we have always done it that way so we continue… We have to have a debate about a more active German role in foreign policy, and security policy and (arms exports policy) is part of it." (“Germany should send Ukraine weapons, says Munich Security Conference chief-designate,” Reuters, 05 February 2022)
Russia: Deutsche Welle to shut down its operations in Moscow
On 04 February, Moscow announced the closure of Deutsche Welle's Moscow office, withdrew its press accreditations and channel broadcasting in Russia. The steps taken were in retaliation for Berlin's ban of the Russian broadcaster RT News in Germany. DW's Russian service in Germany Irina Filatova said: "We clearly expected some measures after RT was banned in Germany. But we never expected that these retaliatory measures by the Russian authorities would be so hard." Filatova further said: "The state of press freedom in Russia has drastically deteriorated over the last years. There's been a huge clampdown by Russian authorities on independent media." Her comments come as the Russian foreign authorities said they were considering placing DW on the list of foreign agents. (Farah Bahgat, "DW's Moscow bureau closes after Russian ban," Deutsche Welle, 04 February 2022; "German anger as Russia shuts international broadcaster Deutsche Welle," BBC, 04 February 2022)
COVID-19
Austria: Vaccine mandate comes into force
On 04 February, Austrian President Alexander Van der Bellen ratified the legislation on the COVID-19 vaccine mandate. It will come into force on 05 February; however, the implementation of the mandate will occur in phases. Those refusing the inoculation will be fined up to EUR 3,600. Austria is the first EU country to make vaccinations mandatory. (Philip Oltermann, “Austria passes Covid vaccine mandate, but question marks linger over enforcement,” The Guardian, 04 February 2022)
INTERNATIONAL
Russia: Putin meets Chinese President Xi Jinping
On 04 February, Russian President Vladimir Putin met with Chinese President Xi Jinping on the inaugural day of the Winter Olympics. President Xi also extended the country's support to Russia over the Ukraine standoff, simultaneously declaring a "no limits" partnership. A joint statement released read: "Friendship between the two States has no limits, there are no 'forbidden' areas of cooperation." Meanwhile, the two countries signed a new gas deal worth USD 117.5 billion, which would grow Russia's Far East exports. The statement also called on the West to" abandon the ideologised approaches of the Cold War". This is the 38th time the two leaders are meeting since 2013. (Andrew Roth and Vincent Ni, “Xi and Putin urge Nato to rule out expansion as Ukraine tensions rise,” The Guardian, 04 February 2022; Tony Munroe, Andrew Osborn and Humeyra Pamuk, “China, Russia partner up against West at Olympics summit,” Reuters, 05 February 2022)
Trawler incident leads to a bank of dead fish off the coast near France
On 04 February, a Dutch-owned trawler FV Margiris released over 100,000 dead fish into the Atlantic Ocean near France, this shedding of fish formed a floating carpet of carcasses. Pelagic Freezer trawler Association, which represents the vessel, claimed that a rupture in the trawler's net had caused the spill. Sea Shepherd, France's environmental organization, said the incident was not an accident but an intentional discharge of fish it did not want to process. This process of unwanted fish is called discharging bycatch which is banned under EU fishing rules. France's Maritime Minister Annick Girardin has asked the country's national fishing surveillance authority to launch an investigation into the accident. (Tassilo Hummel, "Floating carpet of dead fish found off French coast after trawler incident," Reuters, 04 February 2022; "Huge bank of dead fish spotted off French Atlantic coast," BBC, 04 February 2022)
Poland receives US military equipment
On 04 February, Poland said it received US military equipment to reinforce NATO's eastern flank. Poland's Defence Minister Mariusz Blaszczak said: "This is a clear signal of allied solidarity." His comments come after photos of soldiers unloading equipment from a C-130 Hercules transport plane surfaced on Twitter. The US had earlier also announced the deployment of nearly 3,000 American troops in eastern Europe amidst the standoff with Russia. (Alicja Ptak, "Poland receives US army equipment in effort to bolster eastern flank against Russia," Reuters, 04 February 2022