Eurozone Inflation Cooling Off
But also — France’s green industry, Meta fined, Borrell in Morocco, Covid & China
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The Briefing
Eurozone inflation returned to single digits in the last four weeks of 2022. According to Eurostat’s latest data, it is now at 9.2% in December, versus 10,1% in November. While this is good news, the eurozone is not out of the woods yet.
ENERGY • A key element of this drop is the decline in oil and gas prices, which had skyrocketed last year due to fears of a supply crunch linked to Russia’s war against Ukraine and EU sanctions against Moscow. They have now returned to pre-war levels.
Massive stockpiling at the EU level, and the — so far — exceptionally mild winter have certainly helped. Recently, the EU also adopted a mechanism to set an automatic cap on gas prices, which will be able to be activated from mid-February onwards, further ensuring low energy prices.
NOT SO FAST • Although a reduced inflation is obviously welcome, let’s not rejoice too soon. Overall inflation may be slowing down, but this is largely due to the steep above-mentioned decline in energy prices.
Core inflation, which excludes energy and food, is growing. It actually increased more than expected in December, reaching 5.2% year-on-year. Addressing core inflation is key to solving the inflation crisis. This task will require a better understanding of the specific drivers of inflation, now that energy prices no longer seem to be the main culprits.
HIKES • So far, the ECB has taken drastic measures to fight off inflationary pressures. In the second part of 2022, the institution raised the common currency’s headline deposit rates four times. The interest rate on the main refinancing operations (MRO), which provide the bulk of liquidity to the banking system, is now set at 2,5%.
The ECB surprised markets with larger than expected rises, of 50 bps (+0,5%) in July and 75 bps (+0,75%) in September and November. The last rise in December 2022 was lower than the two previous ones, amidst already declining year-on-year inflation.
But don’t expect the ECB to change track on interest rate rises, even with the overall slowing inflation. Sustained pressures of persisting core inflation make it impossible for Christine Lagarde to call it a day and renege on its promise to take inflation seriously. The ECB’s own analysts predict that inflation will remain above the 2% target until late 2025, illustrating their conviction that the battle against inflation is far from over.
DISCREPANCIES • The drop in overall inflation has materialised unevenly across the bloc, from a whopping 20,7% in Latvia and Lithuania to a more manageable 5,6% in Spain. Year-on-year inflation remains in the double digits for Belgium (10,2%), Italy (12,3%), Austria (10,5%), the Netherlands (11,0%), Slovenia (10,8%) and Slovakia (15%).
In France, where Emmanuel Macron has said that the inflation peak is yet to come, bakers are still struggling with energy prices. They have been pressuring the government to announce new measures and design more efficient support mechanisms.
On the other side of the Rhine, the cooling inflation is good news for the government. A recent poll referenced by Politico underlined a steep fall in popularity for the ruling coalition, with Germans increasingly fearing inflation will reduce their private wealth.
In the eurozone — where one single interest rate rules twenty different countries whose economies are not doing equally well — the ECB’s rate hikes have created significant tensions. Italy, where public debt represents roughly 150% of GDP and where the percentage of non-performing loans is high, feels the economic pain of rate rises much more than countries where public and private borrowing is lower.
In Case You Missed It
FRANCE & IRA • French Economy Minister Bruno Le Maire announced a new bill aimed at strengthening France’s green industry. “Let’s take advantage of this period in which every country wants to decarbonize their industry, to become the great nation of industrial decarbonation in Europe”, he told France Inter on 4 January.
The new bill will be presented in the coming days. It will include measures to encourage the startup of new industrial sites on French soil, in the field of hydrogen production, electrolysis, electric batteries, nuclear, and renewable energies.
France’s push comes as a response to the Inflation Reduction Act (IRA), the US’ flagship 369 billion dollar plan aimed at reducing inflation through massive investments in key sectors, including clean energy. The plan could significantly tilt the US market towards made-in-USA electric vehicles. The tax breaks could hit EU industry hard, which has been causing nightmares to EU officials.
Responding to European concerns, the US government has recently made some concessions — see our last edition for more details — but France has made it clear that these are not enough.
Along with the national bill, Le Maire has reaffirmed that an ‘European IRA’ or ‘Buy European Act’ is in the works, driven by his German counterpart Robert Habeck and himself. “The plan will include bigger, quicker and simplified financial aids for all those who want to locate green industries on the European continent”, Le Maire declared. EU Member States have already asked the Commission for proposals on the matter. They should discuss those in February.
META FINE • On 4 January, Meta was fined 390 million euros by the Irish Data Protection Commission (DPC) — the main regulatory watchdog for Meta in the EU — for breaking the General Data Protection Regulation (GDPR). This fine is the outcome of two inquiries regarding two separate complaints about Facebook (210 million euros fine) and Instagram (180 million euros fine).
Before 25 May 2018, when GDPR became effective, Meta changed the legal basis on which it relied for using users’ personal data. The company, which had previously relied on the “consent” of users to provide targeted ads, turned to the “contract” legal basis for most of its data processing operations. Users had to accept Facebook and Instagram’s new terms of service — considered by Meta to be a contract — in order to access the two social media.
Following the inquiry, the DPC judged that “users had insufficient clarity as to what processing operations were carried out on their personal data, for what purpose, and by reference to which of the six legal bases”, and concluded that this lack of transparency contravened Articles 12 and 13 of the GDPR.
“We strongly disagree with the DPC’s final decision, and believe we fully comply with GDPR (...). As a result we will appeal the substance of the decision”, Meta indicated in a news release.
This is not the first time Meta is found guilty of contravening with the EU’s privacy rules. In 2022, the company was fined four times by the DPC for not respecting the GPDR — the fines amounted to 17, 405, 265 and 390 million euros, respectively.
BORRELL • Josep Borrell visited Morocco on 5-6 January. The visit was an opportunity to discuss the continuation of the EU-Morocco partnership within the framework of the EU’s new Mediterranean Agenda. Two new initiatives — a high-level dialogue on security and enhanced cooperation between the EU and Morocco in multilateral institutions — were announced.
Josep Borrell appeared encouraging about Morocco’s work to find a solution to the Western Sahara conflict. He described the country's efforts in this regard as "serious and credible".
Conversely, the EU’s top diplomat took a firm stance on the corruption scandal in the EU Parliament, saying that "there can be no impunity for corruption" and calling on Morocco to cooperate on the ongoing investigation.
His counterpart Nasser Bourita denounced "repeated media attacks (...) which are the result of calculations and a desire to harm this partnership (EU-Morocco).
COVID & CHINA • On 4 January, EU Membertates thrashed out an agreement to take a “coordinated precautionary approach” in reaction to the wave of Covid-19 cases in China. Measures include the use of facemasks in flights to and from China, along with compulsory negative tests for flying to Europe. EU and Schengen area states are however only “encouraged” to implement the measures.
While some countries like Italy have taken early action and pushed for stricter rules, others, like Austria, have resisted them, underlining the economic potential of Chinese travellers returning to Europe after three years. A major point of contention is the alleged unreliability of China’s official Covid-19 data, and the fear of new, more lethal variants emerging and spreading unchecked in Europe.
Meanwhile, Beijing has signalled its opposition to the measures, and threatened to retaliate in kind. EU states will continue to evaluate the situation, and have agreed to re-examine the measures by mid-January.
What we’ve been reading
Notwithstanding the recent cool off, inflation in the Baltics, warned the FT’s Richard Milne and Martin Arnold, could be a cautionary tale for the rest of Europe.
If you missed last week’s edition, it focused on ExxonMobil’s lawsuit against the EU’s windfall tax.
This week’s newsletter is brought to you by Théo Larue, Keram Kehiaian, Maxence de la Rochère and Augustin Bourleaud. See you next Monday!