Eurozone is faced with the dilemma “guns or butter” Where will the money be directed?

There was a mix of relief and cautious optimism in eurozone economic circles earlier this month as the single European currency performed better than expected, with the annual inflation rate falling to 10 percent in November, slowing eurozone inflation for the first time since 2021. Exactly 17 months ago.
The drop in energy prices was the main factor in the fall in the inflation rate in the euro area, but experts still doubt that the drop in price levels will continue in the coming period, and if Spain now has the lowest inflation rate in the entire European currency area, where it does not exceed 6.6 percent , while in France it did not exceed 7.1 percent, Germany is 10 percent.
Most of the speculations at the moment indicate that the drop in price levels during the last month was only a temporary drop, and that the factors driving inflation are still active, and will lead the Eurozone economy to a future inflationary wave, so it can be argued that the inflationary the wave in 19 European countries dependent on the Euro has not yet reached its peak.
These beliefs appear to be prevalent in statements by senior officials in European institutions, as the European Commission has suggested that the eurozone will suffer an economic recession this winter, with inflation lasting longer than expected.
For his part, Paul McCarthy, a researcher at the World Economic Forum, told The Economist: “The situation with inflation in the Eurozone can be understood from the price of a cup of coffee, the drinking of which is an essential part of the daily routine of citizens. A large increase in the price of coffee, which is the main commodity, makes this drink an expensive luxury for many.
“Real wages and consumer confidence are in decline, and this creates obstacles to growth and increases the possibility of social unrest, which we are witnessing at the moment due to the escalation of labor strikes in many eurozone countries,” he added.
It can be said that the Eurozone, which includes the strongest European economies, is currently suffering from a toxic economic mix, where inflation is accompanied by faltering growth. The advanced economies in Europe will grow by only 0.6 percent next year, while the emerging economies will expand by 1, 6 percent, and more than half of the countries will suffer. The Eurozone is technically recessionary, with output shrinking for at least two consecutive quarters.
Eurozone officials see no other solution to contain inflation than continuing to raise interest rates. Last July, the European Central Bank raised interest rates for its first increase in more than 11 years, with expectations to raise them again before the end of this year or early next.
Despite this, professor L. d. Martin, professor of macroeconomics at the University of London, said that the raising of interest rates by the “European Central Bank” has not produced tangible results so far and that the drop in prices in November last year is not a consequence of the effectiveness of the fiscal policy in the euro area. , but external factors, including low energy prices.
He told Al-Eqtisadiah: “Price pressures continued to strengthen and spread across the eurozone economies, prompting the European Central Bank to raise interest rates to catch up, similar to the US Federal Reserve and the Bank of England, which have raised interest rates.”
He emphasizes that Europe in general, and the Eurozone in particular, are facing the dilemma of arms or butter, a situation in which a nation in difficult times has to choose whether to spend public funds on defense or on the needs of its citizens, but politicians in Europe are working to supply Ukraine with weapons, and at the same time time and butter for their people, in order to secure the votes of the voters in the elections, and therefore they find no solution other than borrowing and more borrowing.
Indeed, the available data related to the compliance of the eurozone countries with the financial rules that they set for themselves reveal that about 50 percent of these countries complied with them only in the period between 1998 and 2019, and the financial discipline that sets the upper limit for the fiscal deficit and national debt to 3 percent, or 60 percent, or 50 percent of the eurozone countries failed to achieve this.
However, there are still many optimistic voices who believe that the eurozone, which is the core of the European Union, will not necessarily suffer from tepid growth in the coming years due to inflation. It is true that the war in Ukraine halted Europe’s short-term recovery after the COVID-19 pandemic, and high inflation and the consequent tightening of monetary policy reduced fiscal space.
Turmoil in international trade, a decline in financial flows and a degree of economic uncertainty have undoubtedly left their mark on the economies of the eurozone, but the countries of the single European currency have committed themselves to green and digital transformations, as they strive to reduce the technological gap with their competitors, increase spending on research and development and adopt group Among the studied reforms to improve the workforce, increase investment and improve the performance of public institutions.
On the other hand, Richard Stuka, an expert on European economic issues, believes that the eurozone, specifically Germany and France, are trying to get out of the trap of stagflation, but also to raise interest rates, without causing panic in government bonds. markets on financial conditions in the most indebted countries of the region.
He explained to Al-Eqtisadiah that financial policymakers have numerous challenges to deal with in very different circumstances and there is no doubt that monetary policy is going through a dangerous turn, but the economic foundations of the Eurozone countries are still solid and coherent, and the vibrations to which it is exposed they are not the result of internal factors. As for external pressures, he will be able to deal with them in the long run.
What is certain for now is that the European Central Bank will be tougher on inflation. But Hildy Smith, a banking expert, believes that the core of the problem lies not in the flexibility or rigidity of the European Central Bank’s financial policy, but in the general structure of the financial philosophy that governs the eurozone and the European Bank. Union.
She told Al-Eqtisadiah, “The thing that has not changed about the European Central Bank since its inception is that it continues to bring together a monetary union, that is, a single European currency, the euro, without the infrastructure supporting financial union, banking union or union capital markets.” .
It is emphasized that the institutional structure of the Eurozone and the European Union is by no means complete, and this is the core of the economic problem in the Eurozone and the European Union.