ING’s June Monthly: All eyes on Europe

Christine kicks it all off

Europe is back in the global spotlight, if only for the summer. Off the pitch, the most remarkable action is clearly the ECB’s rate cut decision. The European Central Bank rarely starts an easing or tightening cycle before the US Fed. And the latest cut is even more remarkable as it comes despite accelerating inflation and wage growth amid a cyclical rebound in the eurozone economy. 

If it hadn't banged on about it so much over the last couple of months, the June rate cut would hardly have been needed. In the past, rate cut cycles were always triggered by either a recession or a severe crisis; fortunately, we don't have either right now so this is another unprecedented event. After pandemic, lockdowns, war and an energy crisis, maybe such unprecedented action is realistically 'normal' and hopefully won't turn out to be a policy mistake within a couple of months. 

And the rate cut decision demonstrates a shift within the ECB itself. It's regained confidence in its own forecasting skills and takes enough comfort from the benign inflation forecast from the second half of 2025 onwards to justify cutting rates. It’s like Asterix and his magic potion. All of a sudden, the forecasts debunked and questioned by the ECB itself over the past few years have become powerful and influential again. There's nothing wrong with that , and the rate cut decision also marks an attempt to become a real forward-looking central bank again. Better perhaps that than an uncertain institution preoccupied with backwards-looking data. It's certainly an interesting experiment, and it won't just be markets but other central banks who'll be watching closely.

Electoral dysfunction

The European elections have already started and will continue to resonate well beyond the result declarations. Anti-European parties will, no doubt, grab the initial headlines. Far more interesting in the longer term, however, will be the makeup of the European Parliament and its institutions and whether it and the European Commission will be able to foster more growth-orientated initiatives and plough on with further integration. The elections will also have repercussions for national politics, too, should national governing parties lose too much support. I'm thinking notably of France and Germany here. 

That said, don't expect any immediate economic impact from the elections. As is so often the case with Europe, any change is gradual and becomes more visible through the rear-view mirror rather than the windscreen. 

Lagarde up front

And, if that weren't exciting enough, we have Euro2024, the European Football Championship. It kicks off in Germany, where there's some hope that something like 'soccernomics' does actually exist, lifting the economy out of stagnation and magically making the need for investments and structural changes disappear. Fat chance, I'm afraid. As much as I sympathise with the notion, the economic research released in the run-up to international sporting events is always more optimistic than the reality afterwards. 

But hey, even if there's no long-lasting economic impact, let’s enjoy some interesting decisions, results and matches, with Christine Lagarde playing up front. 

Carsten Brzeski