Europe’s inflation and economic ills to dominate second day of summit

Good morning and welcome to Europe Express.

EU leaders are reconvening this morning to focus on what has become the dominating topic for their governments back home: the worsening economic outlook. We’ll bring you up to speed with what to expect from today’s summit session.

We’ll also hear about the ill-chosen words of French president Emmanuel Macron when expanding on his idea of a European political community and I’ll fill you in on what Balkan leaders had to say after rollercoaster talks with (and about) them at yesterday’s dedicated summit.

Grim months ahead

The discussions at today’s euro summit in Brussels are expected to be unusually detailed by recent standards and almost entirely grim in tone, writes Sam Fleming in Brussels.

The euro summit format has brought together euro area leaders regularly ever since the debt crisis, and it can be a fairly perfunctory affair when the economic tidings are good. 

The outlook as leaders meet today is anything but. A survey of companies’ purchasing managers for June, published yesterday, showed the first contraction in manufacturing output for two years, alongside a marked slowing in services growth. 

Underlying the fading outlook is anxiety about the rising cost of living across Europe — and a realisation that the energy crisis is set to get worse. The decision by Germany yesterday to trigger the second stage of its national gas emergency plan, taking it a step closer to rationing, underscored the threat. It followed a warning from the International Energy Agency this week that Europe needed to get ready for a full shutdown of Russian gas shipments this winter. 

Christine Lagarde, the European Central Bank president, will be quizzed on this unappealing economic landscape when she sits down with leaders at the meeting. The ECB has already set out what a “downside” scenario driven by worsening energy supply disruptions, gas rationing and surging commodity prices might look like. 

Instead of continued economic expansion this year and next, the ECB recently said an adverse scenario would entail growth this year followed by a sharp contraction in 2023, alongside a prolonged period of punishingly high inflation. 

This is not the central scenario being laid out at this stage, but the worsening story in European energy markets means it is by no means out of the question. The bleak message to leaders is there are no easy answers when it comes to addressing the outlook, given the need for the ECB to stay on top of inflation while at the same time avoiding painful divergences in sovereign bond yields. 

The spectre of a further three-quarter point rate increase by the US Federal Reserve underlines just how damaging the situation becomes when a central bank gets behind the curve.

Italy is expected once again to push the idea of implementing price caps on gas deliveries as one way of getting on top of surging costs, but diplomats do not see the idea making headway.

Paschal Donohoe, the eurogroup president, emphasises that the eurozone is institutionally far better equipped to respond to all this than during the euro crisis a decade ago, but leaders have few policy levers available they can readily pull. The message, therefore, is hope for the best but prepare for the worst.

Chart du jour: Eurozone slowdown

Eurozone business activity suffered a sharp slowdown in June, according to S&P Global’s purchasing managers’ index, which fell to a 16-month low as companies complained of high inflation, weak demand and political uncertainty.

Macron strikes again

The metaphorical ink was barely dry on EU leaders’ “historic” decision to grant Ukraine candidate status when French president Emmanuel Macron took to the press lectern to sketch out what he had dreamt up as a potentially more suitable club for the EU’s would-be members, writes Henry Foy in Brussels.

“It is going to take some time. And we are seeing something of an enlargement fatigue phenomenon,” Macron said. “It is a long road to travel. And that is why I have proposed, in the meantime, a European Political Community.”

“We need to think a lot more quickly about how to stabilise our neighbourhood. And let’s be honest, maybe we won’t always be living together in the same house, but we will be living on the same street,” he said, delivering a healthy chunk of blunt realism to all those in Kyiv celebrating the achievement of a significant geopolitical milestone.

Perhaps Macron’s concept may well turn out to be the solution to the EU’s overcrowded waiting room, but it did not go unnoticed that he was suggesting that an organisation which so far only exists in his head could provide a faster solution for applicant countries to gain some form of bloc status than the EU’s official accession route.

Soon after Macron’s press room pitch for his inside-but-outside-the-EU proposal, he joined his fellow leaders back at the summit table to discuss the initiative in more detail.

The aim, according to the conclusions agreed by the 27, is “to offer a platform for political co-ordination . . . to foster political dialogue and co-operation.”

“Such a framework,” the conclusions state, “will not replace existing EU policies and instruments, notably enlargement.”

As one person in the room remarked afterwards: “In private discussions with the other EU leaders, Macron is eloquent and engaged . . . it’s just in public he seems to always put his foot in his mouth.”

Balkan let-down

The summit with six western Balkan leaders ran over by nearly two hours and the disappointment was quite apparent when the meeting ended. Later in the evening, it also temporarily held up an agreement which should have been a mere formality on granting Ukraine and Moldova candidate status.

Several countries, including Austria, Hungary, Slovenia and Croatia, demanded that Bosnia and Herzegovina be given a similar perspective as Georgia, which can become an EU candidate once it meets a series of conditions, diplomats told Europe Express.

“We had intense discussions for 3.5 hours because we wanted to shed light on all aspects, for instance the fate of Bosnia and Herzegovina,” said Austrian chancellor Karl Nehammer. He said Austria insisted that Bosnia also get candidate status if it makes progress this year and that leaders urged the commission to help Bosnia on this path.

A video conference with Ukrainian president Volodymyr Zelenskyy was also delayed during the discussions on Bosnia.

For the rest of the Balkan states, there were slim pickings, as EU foreign affairs chief Josep Borrell admitted: “We are not where we should be with the western Balkans. Today we should be launching the negotiations with Albania and North Macedonia and I cannot hide my disappointment, certainly.”

The two countries are still in limbo as a result of the Bulgarian parliament voting against the government after its prime minister said he planned to lift his country’s veto to North Macedonia and Albania taking the next step on the EU path.

Speaking on his way out of the meeting, Bulgarian premier Kiril Petkov said he hoped the parliament back home would revert to the matter and come to a decision soon. Dutch prime minister Mark Rutte even gave a 50-60 per cent chance for a breakthrough next week.

But all these consolatory messages fell short of reassuring Albanian prime minister Edi Rama, who likened the EU leaders to a “congregation of priests who were discussing the sex of angels while the walls of Constantinople were falling apart.”

“It’s very concerning that even a pandemic and a very threatening war that can turn into a tragic global war haven’t been able to unite them,” Rama said.

His counterpart from North Macedonia, Dimitar Kovačevski, echoed the feeling: “What has happened now is a serious blow to the credibility of the European Union.”

What to watch

1. EU leaders meet to discuss economic and eurozone matters today

2. G7 leaders gather in Germany for a summit starting Sunday

Smart reads

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