A cut of interest rates by 0.25% to 2.75% comes as no surprise and we can expect the ECB to cut at least three more times this year as the Bank moves towards settling its rates at around 2%.
Having calmed inflation – it has not jumped above 3% since September 2023 – the main focus of the ECB has for several months been stimulating the European economy, which on the whole is lacking in energy and dynamism and has been struggling with the after-effects of the Russo-Ukrainian war and the pandemic.
The European economy is in an unfamiliar place.
Countries like Spain, Ireland, and Greece were all criticised heavily by policymakers in Frankfurt during and following the European debt crisis at the turn of the 2010s, and it was the Germans who stepped in and imposed austerity measures to save the Eurozone.
Ironically it is now Germany, the driver of the European economy, who finds itself being outpaced by these countries.
Spain, the fourth largest economy in the Eurozone, grew its economy at 3.5% last year, and its year-on-year growth has not dropped below 2% since its re-emergence from the pandemic. Similarly, Ireland and Greece, while smaller economies than Spain, most recently boasted year-on-year growth of 6.3% and 2.4% respectively.
In comparison, German annual GDP growth has not been recorded above 1.4% since the first quarter of 2022. It is clear who has now become ‘the sick man of Europe.’
While Germany remains the largest economy in the Eurozone, it is stagnating and needs a shot of adrenaline to get it moving forwards again.
Without this, Europe as a whole will struggle to get back on to a much-needed sustainable long-term growth path. It is the hope of the ECB that its gradual but consistent approach to cutting rates will help to stimulate the German and wider European economy in a careful but effective way.
On top of this, there is the Trump card to consider. President Trump and his trade protectionist rhetoric is yet another dampener of sentiment in Europe with its threat to European exports to the US. If the new US administration follows through with these measures, we could see an even more aggressive set of rate cuts from the ECB to resuscitate the economy, as it responds to the impact of reduced exports and economic slowdown.
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