Europe’s economies set to roar ahead this year as vaccinations speed up

Emmanuel Macron knows how to get himself into a clever photoshoot. Earlier this week, the French President was caught on film enjoying an early-morning espresso with his Prime Minister, Jean Castex, on the terrace of a café near to the presidential Elysée Palace.

Supposedly, it was an off the cuff visit to celebrate the lifting of lockdown restrictions. Somehow, though, the TV reporters found out where France’s heads of state were hiding out, and managed to interview the President through the lattice woodwork around the terrace.

Macron told them he was there with the PM for a “little moment of recovered freedom”, adding that he was joyful that France’s Covid figures were coming down fast, with falls in daily cases, hospitalisations and deaths. Later the President wrote on Twitter: ”Here we go! Terraces, museums, cinemas, theatres… Let’s re-discover the things that make up the art of living.”

If any nation knows how to do just that, it’s the French. As of Wednesday – the day of Macron’s visit to the café – all non-essential businesses are back in business. So too are cinemas, theatres and museums, open for the first time since last October. Curfew is now at 9pm rather than 7pm.

There are similar re-openings across most of Europe. Over the last few weeks, cafés restaurants and non-essential businesses have unlocked their doors in Spain, Italy and Germany. Like the UK, most countries are still adhering to strict restrictions – masks, the rule of six and social distancing.

Yet by all accounts, Europe’s recovery from this latest – and hopefully last – phase of the pandemic is not far behind the UK and the US, mainly because the EU has managed to get its vaccination programme up and running at speed.

The latest figures suggest that around 70 per cent of Europe’s adult population could be fully vaccinated by the end of the summer, meaning that the continent is about a month behind the UK in terms of acquiring immunity but also in unlocking its economies.

That also means the eurozone’s economic growth is set to surge as lockdowns come tumbling down and consumers start making up for lost time over the last year.

This optimism is starting to show through in the numbers. A report to be published this weekend by the Centre for Economics and Business Research forecasts that eurozone growth this year will be 4.3 per cent. CEBR’s deputy chairman, Doug McWilliams, says that growth rates may be even higher if the vaccination programmes continue at current rates and restrictions are dropped, allowing a return to some sort of normality.

Yet this rapid growth is raising the spectre of inflation across the EU, which will inevitably lead to higher interest rates. As we have seen over the last few weeks, inflation has crept back into the pipework with the US and the UK both showing sharp spikes over the last few weeks.

Indeed, CEBR is forecasting a strong rebound in growth to 8 per cent this year for the UK but also inflation at 3 per cent by late 2023. The inflation pressures are a combination of years of fiscal and monetary expansion through QE and are now being fuelled by rising commodity prices and supply shortages of raw materials from concrete to computer chips. If inflation does rise to these levels, then CEBR predicts base interest rates at 2 per cent by the end of next year.

Similar inflationary pressures are being seen across Europe. Eurostat figures this week showed that inflation in the eurozone rose to 1.6 per cent in April as energy prices rose from 1.3 per cent in March. The biggest increases were in Hungary and Poland – up 5 per cent – but also 1.6 per cent up in France, and just above 2 per cent in Germany.

German numbers out Thursday are not promising. In April, the producer price index rose by 0.8 per cent month-on-month, following a 0.9 per cent increase in February. But compared with April 2020, the index of producer prices for industrial products increased by 5.2 per cent – the highest year-on-year increase since August 2011.

Like the UK, the price rises were mainly in intermediate goods with prices up 8.2 per cent year on year while energy costs were 10.6 per cent higher. Not surprisingly, non-durable goods saw a small fall.

The reasons for the German uptick are not dissimilar to our own: pent-up demand for certain goods, shortages of raw materials such as timber and energy because of increased demand by people doing up their homes, accidents such as the Suez Canal incident and supply side issues with labour shortages due to the 15-month lockdown. If you have been lucky enough to have escaped to a restaurant, you will have noticed the cost of food, from curries to pizza, is on the up and up.

What will be different is how governments respond to rising inflation, particularly in Germany where some policy-makers, as well as a big chunk of the public, have an inbuilt dread of inflation and are highly critical of the ECB’s expansionary money-printing through its enormous bond-buying programme.

For now, Germany’s constitutional court has taken the side of the ECB. Earlier this week, the Karlsruhe judges rejected a complaint brought by a handful of influential politicians against the ECB bond-buying scheme, deeming that the 2.4 trillion euro ($2.9 trillion) Public Sector Purchase Programme (PSPP) was appropriate.

Critics lost their argument put to the judges that the ECB scheme jeopardises German taxpayers’ money, and breaks the ban on central bank financing of their governments. However, the court ruled that as the German government and the Bundestag had de facto given the green light to the gigantic bond-buying programme, it was permissible.

Yet the row is by no means over. The big question now is whether the ECB will continue with its €1.85 trillion Pandemic Emergency Purchase Programme, which has seen money pumped into the 27-member states to keep the eurozone afloat. (Some €80 billion of bonds were bought in April alone.)

While the programme is due to end in March next year, the ECB is due to decide in June whether to wind down the scheme or keep it ticking over in case of further emergencies. Critics claim that if the ECB continues with the scheme – and inflation does creep up yet further – there will be further challenges to the ECB’s own governing council as well as the German courts.

If the Karlsruhe judges are challenged again, there might be a quite different attitude, one which would have a ripple effect across the continent from the Reichstag to the Elysée and indeed, to No 10. It’s time for central banks to stop printing as though there is no tomorrow.