Europe

European Economics Focus

European Economics Focus

Labour market recovery won’t spark wage spiral

We estimate that the spare capacity in the euro-zone’s labour market has increased by around four million people, or 2.5% of the labour force, since the start of the pandemic. This is likely to disappear over the next couple of years as the economy recovers. Labour shortages are appearing as the economy re-opens, but these are likely to prove temporary and so will not put general upward pressure on wages or inflation.

9 June 2021

European Economics Focus

Inflation in euro-zone to remain lower than in US

Price pressures are building in the US and we think they will be longer-lasting than the Fed expects, but it is a very different story in the euro-zone. A weaker economic recovery and a flat Phillips curve suggest that after a brief period of above-target price rises this year, both headline and core inflation will drop back in 2022. Over the longer term, inflation is likely to trend up to 2% only very slowly.

20 May 2021

European Economics Focus

ECB climate rhetoric to run ahead of action

The ECB will make a big splash about climate change when it concludes its monetary strategy review this autumn. In practice, it is likely to make progress in addressing climate-related risks in the banking sector. The Bank may also announce some steps towards “green QE”, but that is easier said than done and comes with many risks, so we think progress will be slow. That said, the ECB’s willingness to consider a form of directed credit could be a sign of things to come.

18 May 2021
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European Economics Focus

Pandemic has improved Italy’s debt dynamics

The COVID-19 crisis has led to something of a paradox: Italy’s public debt ratio has risen, but the probability of default has fallen. That’s largely because BTP yields are likely to stay far lower than seemed plausible before the pandemic, meaning that interest costs will fall. As a result, we now think Italy’s debt ratio is likely to decline over the next decade.

European Economics Focus

Spain set for short-term gains, but long-term pain

Spain’s economy had been set for a bright 2021 as the vaccine offered hope of a bumper summer tourism season. But the poor start to the rollout means that is now looking less likely. Moreover, the pandemic has exposed structural weaknesses that we think will hamper the subsequent pace of GDP growth.

European Economics Focus

The outlook for E-Z peripheral spreads after COVID-19

We think that the spreads of “peripheral” government bonds in the euro-zone are likely to fall next year to levels not seen since before the region’s sovereign debt crisis and that they will stay low over the next decade. This reflects our view of the outlook for policy in the euro-zone, especially that of the ECB.

European Economics Focus

Risk of inflation lower in the euro-zone than elsewhere

If it is sustained for long enough, the policy stimulus being implemented in the euro-zone could eventually cause inflation to take off. However, we think it is more likely that policy is normalised as the crisis passes. The risk of an institutional slide towards higher inflation is lower in the euro-zone than elsewhere because of its preference for “prudent” economic policy and the built-in constraints of the currency union.

European Economics Focus

Key lessons from Sweden’s Covid response

Sweden’s unique response to the pandemic means that it has acted as a control experiment for economists and epidemiologists alike. We suspect that its economy would have shrunk by an additional 3-4%-points in the first half of the year if it had followed a similar approach to Germany. But this economic gain came at a human cost, albeit one which is difficult to quantify. A post-mortem of Sweden’s experience offers insights into the costs and benefits of different approaches to a second wave of the virus, one of which is that - even in the absence of a legal lockdown - behavioural changes will impose a heavy economic cost if the virus picks up again.

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