Financial TimesFinancial Times

The eurozone economies have no choice but to tackle the supply shock together

By Martin Wolf

18 Oct 2022 · 4 min read

Editor's Note

The eurozone is dealing with an energy crisis that is both inflationary and contractionary at the same time. As a columnist for the FT argues, this means the ECB must walk a very fine line.

The economic challenges facing the eurozone are not the same as those facing the US. On balance, however, they are even more difficult.

The eurozone economy is not suffering from overheating of domestic demand to the same extent as the US. This should make the task of monetary policy easier for the European Central Bank than for the Federal Reserve. But the supply shock buffeting the eurozone is far bigger, with a huge rise in the price of energy, especially gas, after Russia’s invasion of Ukraine. That shock is both inflationary and contractionary: inflationary, in that it has raised the price level sharply; and contractionary, in that it has lowered real incomes for households and the terms of trade for countries.

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