Opinion
By Yiannos Stavrinides
The Eurozone is entering a phase of rising investments, public debt, and real interest rates. In this challenging environment, economic growth is essential to maintain balance. Without it, the region’s next major challenge will be debt sustainability: debt is considered sustainable only if interest rates grow more slowly than GDP.
The year just ending was marked by the largest trade war since World War II. Despite these pressures, the Eurozone demonstrated notable resilience. Preliminary data indicate a strong fourth quarter, prompting the ECB to revise its growth forecasts for the year. Positive readings from the economic sentiment index and the purchasing managers’ index further support this outlook.
Weak exports, constrained by trade restrictions, were offset by stronger domestic demand, bolstering consumption and employment. Unemployment remains low, and wages are rising.
Government investments, particularly in Germany, are beginning to boost growth, focusing on climate-related and security infrastructure. The private sector is also benefiting from favorable financing conditions supported by low interest rates.
While trade restrictions initially caused uncertainty, the impact of tariffs from the second Trump administration has eased over time, thanks to new trading partners and global commercial adaptability.
Inflation remains on target at 2% after a significant decline, though energy price volatility could influence headline inflation. Monetary policy continues to dominate the post-pandemic landscape, while fiscal policy has played a secondary role.
Analysis of inflation components is crucial for assessing interest rate trends. There is concern over service-sector inflation, which is entirely domestic, and high food inflation, which directly affects households. Base interest rates are expected to remain stable in the short term. However, visible inflationary risks suggest that any adjustment would likely involve a rate increase, compounded by the anticipated growth of public debt.
