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Why Europe is suffering a worse inflation crisis than Britain

The Telegraph logo The Telegraph 07/08/2022 Tim Wallace
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If the longest recession since the financial crisis and deepest fall in living standards since the 1960s were not bad enough, Britain is also facing economic humiliation on the international stage – if you believe Government critics.

Keir Starmer last month accused former chancellor Rishi Sunak and Prime Minister Boris Johnson of leaving the UK with an “appalling joint economic legacy of the highest inflation and the lowest growth in the G7”.

The G7 comparison paints Britain’s painful 9.4pc annual price rise in June as a remarkable outlier, but that does not depict the full picture.

Firstly, much of the G7 is in a very similar position: US inflation is at 9.1pc and Germany at 8.2pc.

Secondly, the UK is suffering less inflation than the average EU nation – price rises averaged 9.6pc in June across the bloc.

Figures on the continent range from 6.1pc in Malta – high by historic standards but unusually low today – to a scorching 22pc in Estonia, according to data from Eurostat.

Here are five countries suffering more than Britain:

Spain

As the only big four eurozone nation with higher inflation than Britain, Spain’s price rises hit 10pc in June.

“The way energy markets are so interconnected, a country like Spain, even if it does not import a lot of energy directly from Russia, still pays incredibly high prices,” says Angel Talavera at Oxford Economics.

The country also has its own domestic issues, namely surrounding tourism.

“The prices for services and things related to tourism are rising very strongly. There is a seasonal component, but they are growing very strongly because it is a reflection of the strong, pent up demand for holidays,” he says.

“You can see it in air fares, restaurants, hotels - prices are growing much faster than they were before the pandemic.”

Food prices are up 13.3pc. The cost of accommodation services has risen more than 25pc. Inflation among package holidays is above 10pc.

Greece

Greek inflation hit 11.6pc in June on the EU measure, almost double its 5.7pc peak in 2010 in the wake of the financial crisis.

“Greece is highly exposed to adverse price spillover effects from an energy crunch. Oil and gas account for over 70pc of Greece’s energy mix,” says Joan Hoey at the Economist Intelligence Unit.

“High inflation in Greece mainly reflects elevated global commodity prices, owing to the war in Ukraine,” she says, noting that core inflation - which strips out volatile global factors such as energy and food – was just 1.9pc in June.


Video: EU forecast cuts euro zone growth, ups inflation (Reuters)

“Food and non-alcoholic beverage prices in Greece rose by 12.6pc in June”, adds Hoey, against the backdrop of wheat supply shortage from Russia and Ukraine, which have contributed to the Food and Agriculture Organisation’s world food price index remaining near record highs.

The Netherlands

The Netherlands took a stand against Kremlin intimidation and has refused to pay for gas imports in roubles. Russia’s Gazprom had demanded a change to the usual terms in response to sanctions imposed on Moscow following its invasion of Ukraine.

Russia cut off sales to the country, which is heavily reliant on gas, because of its history as a major North Sea producer.

While alternative sources have been found, rising gas, electricity and petrol prices still account for around half of the Netherland’s inflation, which was 9.9pc in June.

“The Netherlands is very, very dependent on both oil and gas. More than 80pc of the energy mix is fossil fuels,” says Hugo Erken, economist at Rabobank.

This is spreading into other parts of the economy. Meat producers, for instance, rely on gas byproducts to stun animals for slaughter, meaning shortages are pushing up prices. Erken expects food inflation to hit 13pc in the coming months.

Poland

Ukraine’s neighbour, Poland, has also refused to pay for gas in roubles. It is by far the EU’s biggest consumer of coal, which is often used for household heating and was, until recently, heavily imported from Russia.

That ban is a key contributor to the 14.2pc rate of inflation in June. Enthusiastic spending by its government has also pushed up prices, according to Mateusz Urban at Oxford Economics.

“Poland rebounded quite quickly [from Covid], and the fall in GDP was not big in the first place, so if you add on to that a quite generous stimulus that got spent through 2020 and parts of 2021, it translated into a pickup in underlying inflation pressure which was quite elevated already before the pandemic,” he says.

Yet more spending is on the way. Urban says energy support for households, higher military spending and a pledge to ramp up healthcare expenditure means “there are a lot of things to spend money on”.

He adds that even attempts to rein in inflation with higher interest rates have in part been stymied by a holiday on mortgage payments, reducing the effectiveness of the policy.

Estonia

Estonia, Lithuania and Latvia have the highest rates of inflation in the EU – at 22pc, 20.5pc and 19.2pc respectively in June.

Close trade links – because of geography and history – leave the Baltic nations vulnerable to economic hostility from the Kremlin, despite efforts to reduce dependency since the end of the Cold War.

More than 90pc of Estonian gas imports came from Russia in 2020, though it is diversifying, including by building an LNG terminal to enable purchases from other sources.

Food prices have also spiked, in part because of poor local harvests.

“The start of the problem is energy prices, and that is mostly the Baltics paying the price for annoying Russia,” says James Oates, chief executive of Cicero Capital and honorary president of the British-Estonian Chamber of Commerce.

There is also more money in the economy - caused partly by a change in the rules to allow earlier access to pension savings, and Estonia’s tech boom - which is pushing up prices.

“In the last two or three years, Estonia has monetised an awful lot of unicorns,” Oates says, referring to the sale of startups worth more than $1bn.

“In a very small economy - there are 1.3m people - this is a material change. There are a lot of people who walk around with an awful lot of cash in their pockets.”

That is the type of success-driven inflation Britain might envy. While tackling the UK’s soaring bills and impending recession is no small feat, a comparison against peers may challenge criticism of “appalling” economic humiliation.

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