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ECONOMY

ECB celebrates 10th anniversary in Frankfurt

European finance and political chiefs toasted on Monday the European Central Bank's tenth anniversary even as record inflation cast a pall over the party.

ECB celebrates 10th anniversary in Frankfurt
A hungry visitor at the ECB on Sunday. Photo: DPA

German Chancellor Angela Merkel and top European Union officials gathered near the bank’s home in Frankfurt for a gala celebration of the ECB’s success in its first decade.

Confounding early critics who doubted the ECB and the euro would survive, the bank has matured into what is now widely respected as one of the leading forces in global finance.

ECB president Jean-Claude Trichet told his guests: “I don’t intend to name and shame those who said that Europe’s single currency would be impossible, or that its introduction would be a failure.”

Instead, he stressed that “Europeans have achieved what was deemed impossible, what had never been tried.”

Earlier in the day, the International Monetary Fund hailed the ECB for its actions during the most recent trial by fire, when the US market for high-risk, or subprime mortgages collapsed in August and money markets dried up almost overnight.

“The ECB’s liquidity management has been timely and proactive and the flexible framework has proven a crucial stabilizer during the turmoil,” the IMF said in a report.

Amid the eulogies and revelling however, the ECB faced what could be its toughest challenge yet – curbing inflation that was clocked in May at a record 3.6 percent, far above the bank’s target of just below 2.0 percent.

“We know that our fellow citizens are asking us to deliver price stability,” Trichet told a ceremony at Frankfurt’s old Opera house. “We also know that price stability is a prerequisite for financial stability, a very important objective at the current juncture.”

Founded on June 1, 1998 with a mandate to keep inflation in check, from the start the ECB has strived to prevent inflation from getting out of hand. The ECB’s quest has often pitted it against critics, led by France, who claim its obsession with ensuring stable prices distracts it from cutting interest rates to boost growth.

Backed by others such as Austria, Germany and the Netherlands, the ECB has steadfastly rejected such criticism and remained true to its mandate. Nonetheless, many euro-zone residents blame the euro for higher prices, saying the cost of everyday items from petrol to beer has shot up.

Despite pressure growing on policymakers to provide relief, euro-zone finance ministers had few answers Monday to the problem. “I think we have to get used to a world of high oil prices,” said Finance Minister Wouter Bos of the Netherlands.

Jean-Claude Juncker, head of the Eurogroup of finance ministers agreed, but added: “We need to think about how we can ease the burden on the most vulnerable.”

The IMF warned that “rising commodity and food prices will cut into consumption,” which governments had hoped would underpin growth as exports were hit by the euro’s rise against other major currencies.

The single currency was another of the ECB’s biggest early challenges as it introduced the euro, first as an accounting unit in 1999 and then in notes and coins in 2002.

The bank then had to hang on as the currency swung in value against the dollar from an all-time low of $0.8230 in October 2000 to a record high of $1.6011 this April.

Looking ahead, Trichet said the ECB faced three principle challenges – “rapid technological progress, globalisation in all its dimensions, including the transformation of global finance, and population ageing.” It also had work “to extend progressively the euro area across the European Union as a whole,” he added.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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