## Europe Must Succeed in Restoring Price Stability _IMF Blog, October 13, 2023_ ## Source details **Canonical URL:** [Europe Must Succeed in Restoring Price Stability](https://www.imf.org/en/blogs/articles/2023/10/13/europe-must-succeed-in-restoring-price-stability) ## Other formats - [Markdown version](/en/blogs/articles/2023/10/13/europe-must-succeed-in-restoring-price-stability/index.md) - [Structured JSON version](/en/blogs/articles/2023/10/13/europe-must-succeed-in-restoring-price-stability/index.json) - [Bundle manifest](/en/blogs/articles/2023/10/13/europe-must-succeed-in-restoring-price-stability/bundle-manifest.json) ## Bibliographic details - Authors: Alfred Kammer - Published: October 13, 2023 --- ### Inflation trajectory and assessment - Policy interest rates have been raised resolutely, and central banks have signaled commitment to keeping them high for as long as necessary. - Headline inflation is down sharply from the double-digit highs of last year, but underlying inflation (excluding energy, food, and other volatile items) remains more stubborn. - Inflation is projected to return to target sometime in 2025. - Entrenched high inflation is distortionary and would imply prolonged high real interest rates that hurt private and public investment and future growth. ### Findings from recent research and historical context - A recent paper looking at 100 inflation episodes worldwide shows history is littered with examples of premature celebrations of victory in disinflationary fights—each time with inflation making a comeback. - As tighter monetary policies begin to be felt, central banks must not blink; fiscal policymakers should help by lowering still-high deficits to rebuild or preserve fiscal buffers, which will help bring inflation down faster. - Nominal wage growth is expected to pick up before inflation returns to target, recouping some of labor’s lost real income. - With tight policies softening domestic demand, firms’ profit margins should compress and help mitigate the impact of faster wage growth on inflation. ### Risks and scenarios - Upside risks: - Wage growth might outpace assumptions, driving up labor costs. - Profit margins might stay high. - Commodity price shocks (for example, spikes in oil prices) remain a concern. - Downside risks: - If interest-rate increases transmit faster or more strongly to demand and to inflation expectations, inflation could decline more rapidly. - Policy stance: - Monetary policy should remain data dependent and, under the baseline, stay the course and remain restrictive in most countries. - If inflation comes in much lower or higher, rates would have to adjust. - During a disinflation effort, it is better to err on the side of doing a little bit more than of doing less in response to an upside surprise. - A time for interest rate cuts will eventually come, but that time is not now. ### Labor markets and activity - Europe’s jobs markets are strong and have remained remarkably resilient through the pandemic, the energy shock, and sharp monetary tightening. - Tighter monetary policy is feeding into sharply tighter credit conditions; industry is still adjusting to higher energy costs relative to a few years ago. - Some softening of activity is inevitable, partially buffered by steady private consumption supported by recovering real wages. ### Growth outlook and country heterogeneity - Advanced Europe growth forecasts: - 2023: 0.7 percent for 2023 as a whole in advanced Europe (down from 3.6 percent in 2022). - 2024: 1.2 percent. - European emerging market economies (excluding Belarus, Russia, Türkiye, and Ukraine): - 2023: slowdown expected to bottom out this year at 1.1 percent. - 2024: 2.9 percent. - Country performance: - Service-oriented economies (Croatia, Greece, Spain, and Portugal) have benefitted from stronger demand and are expected to grow by more than 2 percent this year; their growth next year is expected to remain stronger than in countries with a greater manufacturing base. - Energy-intensive manufacturing economies will take longer to recover; Germany is projected to see output contracting by 0.5 percent this year before moderate growth resumes in 2024. ### Structural challenges and policy priorities - Longstanding factors weighing on Europe’s growth potential include slowing improvements in productivity (which began well before COVID), population aging, and labor-supply constraints. - For many European emerging market economies, weak productivity combined with a loss of business competitiveness from relatively faster wage growth could stall convergence with advanced economies. - Global shifts adding to challenges: pandemic-related supply disruptions, persistent energy supply issues, geopolitical fragmentation, climate change, and adjustment to new technologies (for example in the car industry). - Fiscal and investment imperatives: - Major investment needs loom, including to keep the planet livable. - Europe’s high-debt countries in particular need to step up efforts to replenish fiscal buffers. - Higher interest rates and slower growth will make it harder to stabilize debt over the next five years especially for European emerging market economies. - Many countries will need to cut spending in non-critical areas and remove tax inefficiencies. - Credible upfront commitments to fiscal consolidation will also help central banks restore price stability. - Productivity improvements through concerted structural reforms in product and labor markets can lift potential growth and achieve fiscal goals at lower economic cost; such efforts cannot be left for later. ### Conclusion - Europe must avoid premature celebrations and re-establish price stability on the first attempt. - Central banks should remain resolute and data dependent; fiscal policymakers should rebuild fiscal buffers to support disinflation. - Europe has shown it can rise to big challenges; the current episode need not be different. *Source: Europe Must Succeed in Restoring Price Stability, Alfred Kammer, October 13, 2023.* --- ## References - [recent paper](https://www.imf.org/en/Publications/WP/Issues/2023/09/13/One-Hundred-Inflation-Shocks-Seven-Stylized-Facts-539159) - [recent research](https://www.imf.org/en/Publications/WP/Issues/2023/06/23/Euro-Area-Inflation-after-the-Pandemic-and-Energy-Shock-Import-Prices-Profits-and-Wages-534837) _Source: https://www.imf.org/en/blogs/articles/2023/10/13/europe-must-succeed-in-restoring-price-stability_