Europe faces more pandemic scars this winter

Germany, worried about both inflation and Covid-19, may soon have a government that will need to act to tackle the underlying problems.

| 4 min read

This week may see the completion of talks to form a new German government. There has been some recent parliamentary action jointly by the SPD, Greens and Free Democrats who are poised to form an administration. The briefings to the press now concern who might fill the different Ministerial slots, which they always said they would do at the end of the talks.

There is still no news on whether the Greens or the FDP will get the coveted slot of Finance Minister. It could, of course, still fall apart – but it is looking likely that the “traffic-light coalition” are keen to control German government from here.

Their first approach was thought to be too weak and resulted in strengthening measures last week.

This coalition has recently stated that it would not renew the full emergency Covid-19 powers, which run out on 25 November, but they are behind a new version in the amended Infection Protection Act.

Their first approach was thought to be too weak and resulted in strengthening measures last week. They assisted the passage of a so-called 3G proposal based on people needing to be vaccinated, or to have recently recovered from Covid-19 or have a recent negative test result in order to be able to use public transport or to work away from home. There are strict rules on care homes and requirements for health and care staff to be vaccinated. More homeworking is to be encouraged.

Pandemic still causing problems

Covid-19 is the main preoccupation again in many continental European economies. Austria has announced a 20-day lockdown nationwide and a requirement for all to be vaccinated by 1 February next year. The Netherlands has a partial lockdown with restricted hours for bars, restaurants and shops and advice to work from home where you can.

In the Czech Republic and in Slovakia there are bans on certain public and indoor activities. Belgium requires more homeworking and mask wearing. This has proved contentious, with bad riots against the policy in the Hague and Rotterdam, and protests in Vienna, Rome, Brussels and Zagreb. None of this is at all helpful to the recovery of these economies nor to a steady build up in trade for Christmas.

The World Health Organisation has been warning about the speeding up of transmission of the virus in parts of Europe and has forecast another half a million deaths in the continent this winter from the disease if tougher measures are not taken. The EU and EEA have now experienced 822,000 deaths so far and 43 million cases. Russia, Hungary, Austria and the Netherlands are seeing particularly sharp rises in cases.

It was against this sombre backdrop that Christine Lagarde of the European Central Bank addressed the Frankfurt Euro banking congress last Friday. She sought to reassure Germans very worried by the 4.5% inflation rate in their country that the inflation will be transitory and is primarily caused by the effects of the pandemic. She drew attention to the spike in energy prices which she thinks will subside next year, and to the supply shortages which should ease.

Near-zero rates

Ms Lagarde thinks, in the medium term, inflation will return to the 2% target. She argued that the inflation itself will cut into real incomes and will restrain demand. She does not think tighter money would help given the problem is largely on the supply side. She contrasted Euro inflation with US inflation. The EU now has 45% of the items in its core basket rising by more than the 2% target, whereas the US has 75%. She believes wages are still under good control on the eastern side of the Atlantic.

  • 822,000 EU Covid-19 deaths so far

We too think the US has a more serious inflation issue than the EU, and the EU has more trouble getting back to and sustaining pre-pandemic output and growth in enough areas compared to the USA. EU policy will be to keep interest rates at zero this year and next.

We still await a clear policy on how much more bond buying there will be. It looks as if the worsening pandemic picture means more support will be justified as the EU tries to get through a difficult Covid-19-plagued winter. Meanwhile Germany, worried about both inflation and Covid-19, may soon have a government that will need to act to tackle the underlying problems.

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Europe faces more pandemic scars this winter

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