The euro zone has proved remarkably resilient, considering the shock of Russia’s invasion of Ukraine and the energy crisis. But the impact of monetary tightening is largely yet to be felt
Start with the positives. The euro zone has proved remarkably resilient, considering the shock of Russia’s invasion of Ukraine and the energy crisis. Gas is now cheaper than it was on the eve of the conflict, after prices spiked last summer. Governments were not forced to ration energy as had been feared at first, in part thanks to unseasonably warm weather. Headline inflation, having reached a record 10.6% in October, is falling.
Economic stability keeps people in jobs. The number in work across the bloc rose again in the fourth quarter of 2022. The unemployment rate is at its lowest since the euro came into existence in 1999; in surveys, firms indicate appetite for new workers. And jobs keep people spending. Despite high energy prices, consumption contributed half a percentage point to quarterly growth in the second and third quarters of 2022.
Europe’s strong jobs market could add to inflation. High prices and labour shortages, which are likely to worsen as oldies retire and fewer youngsters enter the workforce, are pushing up pay demands. In the Netherlands wages jumped by 4.8% in January, compared with a year earlier, after increasing by just 3.3% in 2022 and 2.1% in 2021. Germany’s public-sector unions are threatening more strikes. They want a whopping 10.5% raise, which could set the tone for comrades elsewhere.
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