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The ECB’s rate-hike dilemma as eurozone business activity falls

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The ECB’s rate-hike dilemma as eurozone business activity falls

As eurozone businesses face sharp declines in outputs and new orders, experts believe the European Central Bank (ECB) faces a complex challenge as it decides whether to continue its cycle of interest rate hikes in September.

The August Purchasing Managers’ Index (PMI), published Wednesday, placed the bloc’s business activity at its lowest level since 2020, driven by a sharp contraction in the services sector and a continued decline in manufacturing. Economic powerhouse Germany is the worst hit.

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This poses a dilemma for the ECB, which is expected to make its next move on interest rates in September.

The central bank has been raising the borrowing rate in a bid to curb rising inflation and tame consumer prices. In July, its ninth consecutive rise of 25 basis points took the deposit rate to 3.75%, a joint record high last seen in 2000.

While eurozone inflation is showing signs of abating, dropping to 5.3% in July, it remains well above the ECB medium-term target of 2%. Core inflation – without energy and food prices which are considered more volatile –  also remains stubbornly high at 5.5%. 

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ECB chief Christine Lagarde has repeatedly said interest rates will continue to rise until pressures on consumer prices decline but economic experts believe the negative PMI outlook and other signs of stunting economic growth may split opinions on the Governing Council, the main decision-making body of the ECB.

A ‘balance of risks’

“The ECB will be more concerned with the current rates of inflation as opposed to the decline in business activity, which was not at all unexpected,” Stefan Gerlach, Research Fellow at the Centre for Economic Policy Research (CEPR) and Chief Economist at EFG Bank, told Euronews. “I suspect some members of the Governing Council will want to remain cautious by raising interest rates further, whilst others will want to pause hikes to ease pressure on the economy.”

“The balance of risks is certainly starting to shift. Some ECB governors will be worried that tightening monetary policy further could push the euro area into recession next year,” Gerlach added.

One risk experts also disagree over is whether a pause in rate hike would be just that, a pause, or whether it would actually put a definitive end to the past year of tightening monetary policy. 

“The risk is high that any pause would spell an end to the rate hike cycle,” Carsten Brzeski, Global Head of Macro Research and Chief Eurozone Economist at ING, explained. “This is why the ECB hawks will probably still push for a rate hike in September, which would then be the final hike.”

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“It currently really is a 50-50 likelihood,” he said.

ECB hesitation ‘costly’

Brzeski also believes the impact on businesses shows the ECB has “been too benign on the negative impact of its own rate hikes on the economy.”

With a time lag between implementing monetary policy and its impact showing up in economic data, other experts believe the ECB’s data-based approach is flawed.

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“The ECB says its decisions on the level and duration of restrictions are based on a purely data-dependent approach. But data gives us a picture of the present and the past – it does not tell us much about how to design policy for the future,” Maria Demertzis, senior fellow at Bruegel, said.

“The ECB continues to put too much emphasis on the past as a way of understanding the future and in my view this has meant decisions come late.”

Demertzis believes the ECB should change direction and pause its rate hikes in September.

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“If anything, it has already hesitated too much before pausing. It was too late to start increasing interest rates in September and it now risks making the same mistake by exiting late,” she said.

But whatever Lagarde says following the rate announcement will be just as critical and closely watched. 

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“What will happen next remains highly uncertain,” Gerlach said, “but the signals in Madame Lagarde’s communications, which have in the past created uncertainty, will also be critical as we move forward.”

ECB chief Christine Lagarde has been criticised in the past for communication gaffes which have generated uncertainty on the markets. Her messages in the autumn will be crucial, especially if the Frankfurt-based institution embarks on a new direction as many expect.

The ECB’s next Governing Meeting will be held on September 14.

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'Show solidarity': Pro-Palestinian protesters camp across Australian universities

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'Show solidarity': Pro-Palestinian protesters camp across Australian universities
Hundreds of people protesting Israel’s war in Gaza rallied at one of Australia’s top universities on Friday demanding it divest from companies with ties to Israel, in a movement inspired by the student occupations sweeping U.S. campuses.
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China increases aggressive moves against Taiwan as island prepares to inaugurate new president

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China increases aggressive moves against Taiwan as island prepares to inaugurate new president

KAOHSIUNG — Virtually every day, the People’s Republic of China does something unprecedented — its coast guard briefly boarding a Taiwanese tourist boat, flying military aircraft ever closer to Taiwan or increasing harassment of Taiwanese fishing boats in the South China Sea. 

“This is a problem,” says Dean Karalekas, author of “Civil-Military Relations in Taiwan: Identity and Transformation.” “Because these unprecedented actions are creating a new normal. Beijing hopes that we (the West) will sit by and watch as they take over Taiwan, just as we did when they used these same salami-slicing tactics to take over the South China Sea.” 

The world began noticing more of China’s hostile actions following the visit to Taiwan by former U.S. House Speaker Nancy Pelosi in 2023, but the strategy has been in place for some time. 

“China’s plan to ‘normalize’ military encroachments was planned long before Pelosi’s visit,” Taipei Times columnist and political commentator C. Donovan Smith told Fox News Digital. “The military exercises were far too complex and logistically complicated to have been planned in the short span of time between the announcement of her trip and her arrival in Taiwan.” 

TAIWAN ELECTION: RULING PARTY CANDIDATE WINS TIGHTLY CONTESTED PRESIDENTIAL RACE, UPSETTING CHINA’S AMBITIONS

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President-elect William Lai votes in southern Taiwan’s Tainan city Jan. 13, 2024.  (AP Photo/Ng Han Guan)

Surrounding Taiwan in a mock “quarantine” and performing missile “tests” in 2023 was also intended to push Taiwanese voters toward politicians and parties more friendly to China. But, as has been the case in the last three elections here, Beijing’s ploys were ineffectual. Taiwan in January elected the incumbent vice president, William Lai, to take over from two-term President Tsai Ing-wen. Both Tsai and Lai are members of the Democratic Progressive Party (DPP).   

The incoming Taiwan president has repeatedly pledged to make no changes to policies in place over the last eight years. Beijing, however, sees William Lai (Lai Ching-te) as a “splittist” and a supporter of Taiwan independence. Lai previously did voice support for independence but has tried to walk that back. China, however, does not forgive nor forget. Many political experts believe Beijing will ratchet up pressure as Lai enters office later this month. 

China's Xi Jinping

Chinese President Xi Jinping waves at an event to introduce new members of the Politburo Standing Committee at the Great Hall of the People in Beijing Oct. 23, 2022.  (AP Photo/Andy Wong, File)

A recent example of China’s attempts to establish this “new normal” is changes to airspace rules. China is close to finishing a massive new airport serving Xiamen in Fujian Province. Just 6.2 miles away, however, sits the island of Kinmen, which has remained a part of the Republic of China (ROC), better known as Taiwan, since 1949.

Kinmen Airport is strategically important for Taiwan. In 2015, the two sides worked out a deal to change a flight path that was a bit too close for Taiwan’s comfort. But in February, Beijing unilaterally backed out of the deal, announcing that, from May 16, new air routes would begin operating to “further optimize airspace” around the area. 

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FOR CHINA’S MILITARY PLANNERS, TAIWAN IS NOT AN EASY ISLAND TO INVADE

A Chinese fighter jet seen near Taiwan

A fighter jet flies in the direction of Taiwan as seen from the 68-nautical-mile scenic spot, the closest point in mainland China to the island of Taiwan, in Pingtan in southeastern China’s Fujian Province Aug. 5, 2022. (AP Photo/Ng Han Guan)

Few China watchers think China picked the day arbitrarily, says Karalekas. 

“Beijing has a pattern of testing new leaders of enemy states. They tested Bush with the EP-3E spy plane incident. They tested (then-Japanese prime minister) Naoto Kan with the Senkaku boat collision. We can expect them to test Lai by creating some sort of mini-crisis around the time he takes office on May 20.” 

“I think China is really ramping up threats,” Eric Hsu told Fox News Digital. Hsu lives in southern Taiwan’s biggest city, Kaohsiung, has worked on historical restoration projects and hosts a podcast on Taiwan history.

He says he isn’t only worried about military hardware, but also what he termed, “brainwashing videos and moves by KOLs,” (Key Opinion Leaders, a term used to describe internet influencers).

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Taiwan military vehicles equipped with U.S. missiles

Military vehicles equipped with a U.S.-made TOW 2A missile during a live fire drill in Pingtung, Taiwan, July 3, 2023. (REUTERS/Ann Wang)

Hsu places much of the blame at the feet of local opposition parties seen by many as more friendly to Beijing. Describing the current domestic political situation, he said Taiwan faces “not just an enemy at the gate, but also enemies within.” South Taiwan is a DPP stronghold, but not everyone in the south agrees that the opposition parties are the problem. 

Another resident of Kaohsiung, a self-employed businessperson and mother, Ms. Lin, thinks the DPP hasn’t been sincere in reaching out to China. 

“They’ve had eight years, and now they will get at least another four,” Lin told Fox News Digital. “What Taiwan needs are brave leaders, people willing to try new solutions, and I don’t see any such people in the current DPP leadership.”   

TAIWAN PRESIDENT-ELECT CHOOSES NEW FOREIGN, DEFENSE MINISTERS AS CHINA ANNEXATION THREATS INTENSIFY 

Taiwanese soldiers conduct live military exersies

Soldiers disembark from AAV7 amphibious assault vehicles during the Han Kuang military exercise, which simulates the China’s People’s Liberation Army invading the island July 28, 2022 in Pingtung, Taiwan. (Annabelle Chih/Getty Images)

The main opposition party, the Kuomintang (KMT), denies it is “China-friendly” and instead says it is “peace-friendly.” Chinese dictator Xi Jinping has met with the KMT’s Ma Ying-jeou twice, first in Singapore in 2015 when Ma was in office as ROC (Taiwan) president. It was the first time since the end of WWII top leaders from China and Taiwan sat in the same room. Each side in 2015 chose to ignore official titles and address each other as “Mr. Xi” and “Mr. Ma.” On April 10,, “Mr. Xi” and former Taiwan president “Mr. Ma” met again, this time in Beijing. 

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Some experts see such meetings between the KMT and China favorably, arguing that any dialogue is good and – if nothing else – provides a way for China to save face as it continues its policy of mandatory “reunification,” which China now says may need to be achieved by force. Others in Taiwan and abroad see Ma’s meetings as straying far too close to an acceptance of the idea that Taiwan is a part of China. 

 

China warship

A Chinese warship sails during a military drill near the Taiwan-controlled Matsu Islands near the Chinese coast April 8. (Reuters/Thomas Peter)

As it stands, the ruling DPP says it’s content with the status quo, including keeping Taiwan’s official name, the Republic of China. The KMT is generally more in favor of talks with Beijing under a mutual respect “consensus” idea that boils down to agreeing that both sides are “China,” but each side is free to interpret what this “one China” means.  

The problem with the KMT’s thinking, central Taiwan-based newspaper columnist and political commentator Michael Turton told Fox News Digital, is that “Xi’s goal is the complete subjugation of Taiwan, just like Hong Kong. Two of China’s ambassadors abroad have already indicated that Taiwanese opposed to Beijing rule will be shipped off to concentration camps. Given this goal, how can there ever be dialogue with mutual respect?”

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Brussels, my love? Champage cracked open to celebrate the Big Bang

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Brussels, my love? Champage cracked open to celebrate the Big Bang

In this edition, we zoom in on dwindling press freedom in Europe and check how Europe is doing 20 years after the big bang enlargement.

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This week, we are joined by Olena Abramovych, Brussels correspondent for Ukrainian TV, Ricardo Borges de Castro, analyst in European and global affairs and Polish journalist Dorota Bawolek.

Panelists reflect on the big bang enlargement of the European Union that took place 20 years ago when leaders of 10 new countries presented their flags to Pat Cox, then president of the European Parliament. Despite the bumps along the way, the panel agreed it was a success.

“Even though you can say that the story has not always be rosy, over the past 20 years it has been a great story”, Ricardo Borges de Castro said.

The panel also marked International Press Freedom Day by focusing on the dwindling press freedom in the EU.

“It is very worrying and at the same time, unfortunately, not very surprising”, said Dorota Bawolek, who suffered attacks both online and offline for her reporting, and experienced censorship.

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“Democracy in Europe is not living its best days at the moment. And media and media freedom is one of the victims of it”, she said.

Watch “Brussels, my love?” in the player above.

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