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Euro debt crisis ‘could last a decade’

The European debt crisis could take a decade to overcome, according to Bundesbank president and ECB council member Jens Weidmann, who added that the ECB could cut interest rates if new information warranted such a move.

Euro debt crisis 'could last a decade'
Photo: DPA

“Overcoming the crisis and the crisis effects will remain a challenge over the next decade,” Weidmann – who is president of Germany’s central bank the Bundesbank – told the Wall Street Journal.

His view contrasts with recent comments from European Commission President Jose Manuel Barroso that the worst of Europe’s crisis is over.

Weidmann said the European Central Bank could cut interest rates below their current record low rates if necessary, but that doing so may not actually prove very effective.

“We might adjust in response to new information,” however, “I don’t think that the monetary-policy stance is the key issue,” said Weidmann.

The ECB slashed its key interest rate to an historic low of 0.75 percent last July and held it there ever since.

Financial markets have nevertheless speculated on a further cut in order to pull the eurozone economy out of recession.

But ECB officials have consistently argued that additional monetary easing might not actually prove very effective as the low level of interest rates was not feeding through to those economies in the 17-country euro area that needed it most.

“Everyone is asking what more can the central bank do instead of asking what other policy makers can contribute,” Weidmann said.

The Bundesbank chief has long expressed concern that central banks are under too much pressure from politicians to spur growth in their economies through ultra-low interest rates and other stimulus.

“A point that I think is important to make – perhaps less for my central bank colleagues than for finance ministers – is that the medication monetary policy makers administer only cures the symptoms and that it comes with side-effects and risks,” he argued.

AFP/jlb

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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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