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Eurogroup seeks path between high inflation, slower growth

BRUSSELS (AP) — Euro finance chiefs on Monday ventured into a high-wire political balancing act prompted by conflicting economic forces: a weaker growth outlook and stronger inflation.

Finance ministers from the 19 nations that share the euro currency pledged continued budgetary stimulus for the European economy amid headwinds caused by the highly transmissible Omicron variant.

At the same time, they sought to reassure voters by vowing vigilance over sharp price rises.

“Am I concerned about inflation? Obviously so,” Dutch Finance Minister Sigrid Kaag told reporters in Brussels where she attended a meeting with her euro zone counterparts.

“The purchasing power of the individual citizens will be affected.”

The euro zone faces a slowdown in economic growth this year after a solid recovery in 2021 from a severe coronavirus-induced recession two years ago.

But surging inflation, which reached a record five per cent in December and is tied to an energy-market squeeze, has complicated the picture – for both policymakers and voters.

A small producer of olives and pomegranates along Greece’s eastern coast Ioanna Orfanou said the prices that she pays for fertiliser and insecticides jumped to alarmingly high levels in the second half of last year.

“This trend is very worrying,” Orfanou told The Associated Press. “It gets harder for small farmers to stay in business because we have limited room to pass on the cost increases to average consumers.”

Such sentiments have helped spark questions about the European Central Bank’s (ECB) policy of keeping the euro zone money supply loose to fuel economic activity.

The Frankfurt-based ECB has offered support in two key ways: maintaining its interest rates at zero or less and helping to keep other market borrowing costs low by purchasing hundreds of billions of euros of assets in financial markets.

Board member of the CEPS think tank Daniel Gros said the ECB should now act in a nuanced way by ending the pandemic-induced asset buying while holding its interest rates at the current ultra-low levels.

The euro region’s gross domestic product is projected by the European Commission to expand 4.3 per cent in 2022 after an estimated five per cent growth last year and a 6.4 per cent contraction in 2020.

Still, the predicted growth is higher than projections of a maximum four per cent GDP expansion this year in the United States (US), where the central bank has warned about the economic threats of inflation and signalled an imminent tightening of monetary policy.

By contrast, ECB officials, including President Christine Lagarde, have indicated they are in no rush to raise interest rates, arguing that euro-area inflation will fall back to the bank’s two per cent target in due course.

The Commission has predicted a further slowing of euro-area economic growth in 2023 to 2.4 per cent.