There were hopes that 2024 would be a good year. Economists talked of a soft landing, by which they meant a solid rebound from last year’s high-inflation, high-interest shock. A drop in inflation would spark cuts to the cost of borrowing while trade expanded, unemployment stayed low, and household disposable incomes increased.
This cheerful scenario was going to be played out across Europe and allow the EU and UK to pursue many of the goals, not least tackling climate change, that were delayed as ministers sought to protect business and household finances from the fallout from the pandemic and the Ukraine war.
Consumers were going to recover some confidence and businesses would shrug off a decade of confusion brought on by Brexit, the US-China trade dispute, and a global public spending drought that had stymied private investment (because private investors like to piggyback on taxpayer-funded schemes).
The European Central Bank (ECB) was expected until recently to acknowledge an improving domestic and global outlook with a first cut in the cost of borrowing. Unlike the Bank of England and US Federal Reserve, which are expected to delay their first move until the end of the year, the ECB was thought to have dished out enough tough love. Financial markets still expect a 0.25-point cut on Thursday when Christine Lagarde and fellow policymakers meet in Frankfurt to set interest rates for the bloc.
Smiles are likely to be in short supply, however. While a reduction to 4.25% in the main interest rate, if it happens, will cheer borrowers across the eurozone, it is likely to be accompanied by a more equivocal narrative about the year ahead.
Too many harsh realities are crowding out a fairytale ending to the topsy-turvy economics of the past four years for the ECB to appear relaxed. Gas prices are rising, oil prices remain high and other commodities remain volatile.
Uncertainty about the Middle East, China’s support for Russia in the war with Ukraine, and the US election in November add to growing political uncertainty.
UK food prices are 20% higher than in 2021 and the most recent figures from major European economies show inflation rising again. According to statistics body Eurostat, annual price growth across the eurozone is expected to be 2.6% in May, up from 2.4% in April. Both France and Germany have suffered an unexpected increase in inflation.
European elections next weekend could also add to anxiety over the economic outlook if moderates lose ground and the balance of power shifts to the extremes.
A message from the ECB that rising inflation means interest rates are likely to drop very slowly will be a blow to incumbent politicians seeking re-election on their record from the past four or five years.
There is a strong case for arguing that Europe has survived remarkably well in the past two years, considering the potentially disastrous effect of having to import both gas and basic commodities at sky-high prices from outside Russia. Without swift action by Brussels there could easily have been a deep recession and a jump in unemployment.
Yet stagnation, while better than recession, is not a basis for hope. There is still a costly war to fight with Russia, and if EU and UK politicians insist on using taxpayer funds for that, there will be little left to spend on healthcare, education or public transport. Privatisation will become the default option when society demands something new, with the inflated cost of the service passing to consumers.
Defence budgets are going to balloon unless a decision is taken at the G7 meeting later this month to use Moscow’s frozen assets – the ones deposited by Russia’s central bank in European financial centres – to fund the war and reconstruction of Ukraine.
Poland has already increased its defence spending to 4% of gross domestic product. If all European countries, including the UK, follow suit, there will be a considerable war chest at President Zelenskiy’s disposal. But there won’t be much money for anything else on Europe’s agenda.
Some European countries, principally Germany, have plenty of room to borrow more. And the EU has proved adept at generating funds itself. As it says, €1.2tn of funding between 2021 and 2027 plus an extra €800bn will help rebuild a post-Covid-19 Europe.
It will be money wasted if Ukraine loses the war. Much better would be to ally this spending with a confiscation programme so the Russians can fund the Ukraine’s defence.
Otherwise a grim year ahead will become two or three or many more, scarring a generation.
