Economic plight affects EU move on Ukraine

The European Central Bank (ECB) has cut interest rate to 2.5 per cent, even as ECB Governor Christine Lagarde admitted that there was a lot of uncertainty surrounding the economic situation.

She was responding to the question whether there would be further cuts in the interest rate. Explaining the decision to cut the interest rate, Lagarde said, “It (the decision) was made as a result of substantive discussion all around the table on the state of the economy, on the projections, on the risks that we are facing, and the decision was a consensus and no one opposed the decision.”

During the press conference, she had however admitted that there was one abstention. About the prospects of a future rate cut, she said, “If the data indicates to us that in order to reach destination, the appropriate monetary policy should be to cut, we shall do so. If, on the other hand, the data indicates that is not the case, then we shall not cut and pause. So that’s really where we are – not pre-committing, being data-dependent as ever, and deciding on meeting-by-meeting basis.”

Lagarde indicated that the ECB had also felt that the tariff war – she did not mention US President Donald Trump – and retaliatory tariffs was net-negative, and it is to be avoided. Perhaps, she is hinting that there should not be retaliatory tariffs as in the cases of Canada, Mexico and China. She would want the European Union to negotiate with the US in case Trump imposes reciprocal tariffs on imports from the EU zone.

The press statement issued by the ECB supported the decisions of the European Commission and Germany to increase spending on defence.

It said that this would help increase investment in the EU and it could be a reason to spur economic growth. The figures issued for inflation rates and for growth rate that it was a fine balancing line, and the downward risks are quite high. The EU zone is not doing well in terms of economic growth and that is affecting the political and social situations. The increase in food and fuel inflation is on the high and it is leading to protests across many EU member-countries.

The tight economic situation also exerts great pressure on the EU’s political elbow room to organise military and other aid to besieged Ukraine, even as President Trump is making a direct deal with both Ukraine President Volodymyr Zelensky in spite of the stand-off in the White House. Trump is also directly in touch with Russian President Vladimir Putin. This results in the marginalisation of EU, which has more at stake in the Russia-Ukraine war.

Given its sensitive economic situation, it becomes difficult for EU to exert political and diplomatic pressure on either Russia or the US. And as EU is not in a position to stand up for Ukraine, Ukraine is forced to yield to terms of peace dictated by Trump. There is recognition that unless EU becomes a vibrant economic zone on its own, it would be caught between the two big economies of the world, the US and China. EU has been planning tariffs against China, but this was before Trump came on the scene and threatened tariffs against EU as well as other countries.

The revival of economic growth in the EU zone is more vital now than ever before. The EU cannot be the important player in the global arena that it wants to be though it still has the advantage of a manufacturing hub with a technological edge. But the advantage could be lost if there is no domestic consumption within the EU, that could in turn stimulate economic growth.