"Europe is losing the battle"

Last week big news came from the European Central Bank (ECB) which decided to cut interest rates even though inflation did not fall to two percent.

When asked why it was thought to be the right time for that, ECB president Christine Lagarde told HRT that the governing council decided last week to reduce interest rates by 0.25 percentage points, reports Tportal.

"Based on the available data, we believed that inflation would continue to fall towards our two percent target. I will give you three figures. The highest inflation was 10.6 percent, and that was in October 2022. Last September it was 5.2 percent. "Then we decided to freeze rates. According to the latest reading, inflation in the Eurozone is active. All our forecasts since last September show that we will reach the target in the second half of 2025," Lagarde emphasized.

She also mentioned the key consequences of this decision. "The key consequence of our decisions was a small reduction in the interest rates that people pay. If you need a mortgage loan because you plan to buy a house, if you have a company and you want to invest and you need financing, the banks will offer you reduced interest rates, lower than a year ago. This is one of the main consequences of our moves. Financing is more available, and interest rates are still higher than GDP growth," she explained.

Do we have to fear stagflation? "I wouldn't say it was stagflation. Inflation was falling, but we also had stagnation. We were positively surprised by the first quarter of 2024. We achieved growth of 0.3 percent, while everyone expected 0.1 percent. That led us to improve the growth forecasts in 2024. So, instead of 0.6 percent, if I remember correctly, we predicted that the growth would be 0.9 percent," she said.

Geopolitical risks and global economy challenges

The world economy is linked to potential geopolitical risks. Lagarde mentioned three types of biggest challenges or risks. The first is the war in Ukraine and the Middle East, the division of market economies led by the USA and China, and climate change risks.

"First, the immediate geopolitical risks. There is a terrible war between Russia and Ukraine. The second relates to the tragic conflict in the Middle East. This is the first category of geopolitical risks. In the second category are the general trends that we are currently seeing. These are geopolitical divisions between some developed countries, led by the United States, and some emerging market economies, especially China.

We are currently seeing significant trade tensions between the United States and China. And Europe has increased tariffs on China. Lagarde also said that there are rules of the World Trade Organization.

"If all countries respected those rules and refrained from changes, gimmicks, violations, exceptions, and subsidies, the world economy would be in a better state. I am concerned about the increasing violation of the rules as the gap between countries grows. Those rules are being broken ten times more in the past three years," she pointed out.

Lagarde agrees with the analysts who claim that Europe is losing the battle in terms of competitiveness and that radical changes are needed. 'It's nothing new. Europe has always lacked competitiveness, at least in the past few decades. But that situation is getting worse now," she said.

As for financial analysis, Lagarde believes that "a liquid, unified capital market is one of the answers to that."

The future of the Eurozone

Will a new member join soon? "I think the Eurozone is destined to include almost all European countries. A few countries decided right at the beginning not to join. OK. But all the others are on the way to joining. I think the closest to convergence is Bulgaria. We will see how it will turn out in the next few months. I hope it will turn out well," Lagarde said.