The European Union Macroeconomic Context

Study Extracts A and B, and then answer the questions that follow.

Extract A: Harmonised Index of Consumer Prices (HICP) Inflation Rates (Annual % Change)

Extract B

In late 2022, several Eastern European member states raised alarms about a widening economic 'inflation chasm' across the continent. There were growing concerns that without coordinated financial transfers or common energy subsidies, the economic divide between the more resilient Western members and the inflation-exposed Eastern members would only widen. Germany’s unilateral implementation of a €200 billion energy shield ("Doppelwumms") to subsidise domestic energy costs symbolised, for many, the unequal capacity of member states to protect their industries during systemic crises.

This divergence in fortunes is viewed by Baltic and Central European members as a threat to internal market cohesion. At the same time, fiscal conservatives in core Euro Area states, such as Germany and the Netherlands, have grown increasingly wary of joint debt obligations and the rising expectations of financial solidarity from highly indebted or disproportionately impacted states.

At the Brussels Summit in late 2022, warnings were made regarding 'the greatest crisis of European integration since the sovereign debt crisis'. Calls were made for coordinated supply-side interventions and common purchasing agreements to maintain Single Market integrity and avoid internal trade protectionism.

Real wage contraction is now widespread, hitting Central and Eastern European economies harder than those in the West. This drop in purchasing power erodes consumer confidence, dampens domestic demand, and triggers industrial action across various sectors, creating further supply-side bottlenecks.

Nevertheless, core Western nations have hardly been immune. The Netherlands, for instance, saw inflation peak near 17% in autumn 2022. However, the subsequent drop in inflation in Western nations has been much steeper than in Eastern European states like Hungary, where structural factors and weaker home currencies have kept prices persistently high.

Disagreements over the European Central Bank’s (ECB) aggressive interest rate hikes have intensified. Southern and Eastern members warn that rapid tightening could trigger a sovereign debt crisis or deeper recessions, while Northern members assert that tight monetary policy is overdue to tame core inflation.