French politician, economist and lawyer Christine Lagarde, who is also importantly president of the European Central Bank (ECB), has come out and written a blog on the economic situation Europe is in right now.

The quick-fire summary is - the EU economy is reopening, but we are not going back to pre-pandemic levels just yet.

Why? Lagarde lists three pieces or shocks that have caused concern and will take time to manage, such as logistical disruptions that have led to the increases in price of raw materials as well as food.

Secondly, supply and demand of some goods that leads to tightening of supply and hence prices increases.

The third concern or shock she calls out is the actual economy reopening leading to major shifts in consumption patterns.

Inflation basket

According to Lagarde, less than 20% of all components of the eurozone's inflation basket rose faster than 2% a year before the pandemic. Now that is apparently 75%.

She also notes that supply chains may change for geopolitical reasons. This makes the global economy less efficient and leads to structurally higher inflation at least for some time. The war-accelerated 'green transition' will have the same effect.

Finally, Lagarde notes that inflation expectations have risen. She adds that the 'right tail' of the distribution of expectations has broadened. This means that the risk of much higher inflation than we would like has increased.

No longer appropriate

Lagarde concludes that the extremely accommodative pre-pandemic monetary policy is no longer appropriate.

After all, that policy was aimed at boosting inflation and inflation expectations that were judged to be too low. That is no longer necessary.

That is why Lagarde is informally announcing a normalisation of the policy. It is now almost certain that in July, the ECB will stop buying bonds and interest rates will certainly rise.

At the end of the third quarter, it is likely negative interest rates won't be around anymore.

While many financial industry experts suggest we can’t avoid a recession in Ireland, the latest confidence indicators do not suggest a recession in the eurozone any time soon.

US

The same question is asked whether the American economy might end up in recession as well.

The combination of purchasing power eroding inflation, the sharp rise in interest rates and the increased uncertainty due to the war may work in that direction.

A bit to play out in the EU and the US before the recession clouds darken the sky, just yet.

Read in full on Europa.eu if you like.