the cost of living worried Europe again

We close a year in which Europe has rediscovered inflation, the energy crisis and high interest rates, which for years seemed largely forgotten by local economies. The war launched by Putin against Ukraine at the beginning of 2022 has been the great catalyst for the collapse of recent European economic paradigms. That is, energy, money and food, all cheap.

In April, Professor Rubén Garrido-Yserte (UCLM) reminded us that inflation “is a loss for almost everyone, since it causes the impoverishment of the economy as a whole.”

In his text, the author pointed out that, in periods of rising prices, the purchasing power of citizens falls if their incomes do not rise at the same rate as prices (while the State maintains tax collection).

inflation and taxes

The general rise in prices caused a political debate on the tax system in Spain: while some communities decided to cut taxes, the Government announced the creation of three new temporary taxes on banks, energy companies and large fortunes, which will come into force this 1 from January.

In a context of deficit in public accounts, inflation and inequality, Professor Alejandro Esteller-Moré (UB) reminded us that “the manual recommendation is to increase the tax burden (or, at least, not decrease it) and the establishment of compensations for the most disadvantaged groups”.

Labor notes 2022: rights achieved and SMI

Among these vulnerable groups is the housemaids (in Spain, more than 95% of workers in the domestic sphere are women) who, however, in 2022 advanced on the path to decent work.

At the beginning of September the Spanish Government equated their labor rights with those of the rest of the workers and they will finally be able to collect unemployment and see their compensation for unfair dismissal improved. It remains pending to regulate the conditions of internal domestic work.

In 2022 the weight of inflation has affected the minimum interprofessional wage. Set at 1,000 euros since January 1 of this year, given the sustained rise in prices over the last 12 months, the unions are now demanding an increase that will bring it to at least 1,100 euros compared to the 1,040 euros that , instead, offers the employer.

At the beginning of the year, Professor Inmaculada Cebrián López from the University of Alcalá, explained to us that the goal should be for Spain to accept the proposal of the European Social Charter (which seeks to guarantee workers the right to sufficient remuneration for a level dignified life) that, in 2023, the SMI is equivalent to 60% of the average net salary.

However, we will have to see what is achieved in the current scenario of high inflation, in which wages have generally risen less than the cost of living.

Types of interest and mortgages

At the end of July, Europe went on vacation with the news that, to counter inflation, the ECB was tightening its monetary policy and raising interest rates. The purpose? To discourage consumption in the euro area to contain the rise in prices.

When, in July 2021, the ECB established a medium-term inflation target of 2%, the economic outlook suggested that it was a matter of correcting both upward and downward deviations from said target. This measure served, then, as the basis for the expansionary actions of the ECB (the negative rates of that time), motivated by inflation levels below 2%.

Closing 2022, the European Central Bank has left rates at 2.5% (from rate 0 with which the increases began at the end of July) and acknowledges that it plans to continue increasing them, “at a sustained rate” until returning to the target of 2% in the medium term.

This decision is having consequences for families: the measure taken by the ECB to control inflation makes money more expensive and increases the cost of future mortgages (whether at a fixed or variable rate) and those already contracted at a variable rate .

The ghost of stagflation

The point is that some experts fear the worsening of the situation. If inflation were added to a slowdown in the economy, it would lead to a scenario of stagflation or inflation with stagnation.

In autumn, the IMF presented its forecasts for the coming year. Professor Sergi Basco, from the UB, analyzed the content of the report which, with an estimate of 2.7% growth, would place 2023 among the 3 worst years for the global economy in recent decades.

On the other hand, the Fund forecasts growth of 1.2% for Spain, instead of the 2% of its previous forecast. In his analysis, Professor Basco highlights, given this worse data, that the General State Budgets for 2023 have been calculated based on a growth estimate of 2.1%.

In line with the IMF forecast, the Bank of Spain closes 2022 by lowering its growth data for Spain by one tenth, to 1.3%, for the same period. The good news is that it also lowers its inflation forecast from 5.5% to 4.9%.

In this regard, it is worth remembering the words of Professor Carlos Gutiérrez Hita (Universidad Miguel Hernández) in his article about the risks of zero economic growth: “If economies were to stagnate and gradually land at zero growth, social conditions of the population would deteriorate and, what is worse, the effect would be self-sustaining, with its consequences increasing and sliding towards negative growth”. We will have to see how the economies evolve in the new year.

Elba Astorga, Economy, The Conversation

This article was originally published on The Conversation. Read the original.