Müller: Eurozone economy continues to grow at a moderate pace

TALLINN - The Eurozone economy continues to grow at a moderate pace and the labor market remains strong, with recent statistics supporting the assessment that inflation will stabilize near two percent in the foreseeable future, said Madis Müller, President of the Bank of Estonia and member of the European Central Bank's Governing Council.

He said the start of the year has been eventful in foreign policy, with more abrupt price changes in currency, bond, and commodity markets. "We learned that for the US President, trade agreements signed last year with European countries are not final and can be reopened to exert pressure. US threats toward Greenland and the removal of the Venezuelan president increased general anxiety in financial markets and undermined the reputation of US securities as a reliable 'safe haven' in turbulent times. This has resulted in a weakening of the dollar and a rise in the price of precious metals, though much of this bubble has burst over the last week," Müller noted.

According to Müller, investors who had placed their assets in Japanese government bonds were startled: the prime minister announced new elections, increasing the likelihood that the budget deficit would widen even further-yet Japan's debt burden is already massive. Interest rates in Japan have been on an upward trend for several years, but at the end of January, the bond market reacted particularly sharply to the news, and borrowing became significantly more expensive for the government overnight. This should also remind European governments that a large debt burden and budget deficit reduce the room for maneuver in shaping economic policy.

"In the Eurozone economy, by contrast, there have been no major surprises in the last couple of months, and thus the European Central Bank's December forecast remains a good foundation for interest rate decisions. At the beginning of the year, inflation in the Eurozone slowed even slightly more than expected, and consumer prices for the Eurozone as a whole were only 1.7 percent higher in January than a year ago. Economic growth, on the other hand, exceeded expectations at the end of last year-for 2025, the Eurozone economy grew by 1.5 percent (for comparison: GDP growth in 2024 was 0.9 percent). According to surveys, Eurozone entrepreneurs are also more optimistic about their business prospects for the near future," Müller noted.

According to him, a sort of balance has thus been achieved in the Eurozone economy in the short term: inflation is near the central bank's two percent target, the economy as a whole is growing moderately, and interest rates are at an appropriate level, all things considered. "However, taking a slightly longer view, we should not feel too complacent. The Eurozone's estimated growth capacity, or potential economic growth in technical terms, has decreased in recent years and will fall to around one percent in the coming years. This means that countries with larger budget deficits, in particular, face very difficult choices. It is not easy to get the growth of the debt burden under control when an aging population automatically increases pension and healthcare spending, the working-age population is shrinking, and European countries also need to invest more in their defense capabilities," Müller noted.

According to Müller, the future of the European economy will be affected in the coming years by how well we can adapt to the new reality in foreign trade. "The issue is not just about the tariffs imposed by the US on goods from Europe and other countries, although this is of course important and has received the most attention over the past year. At the same time, European countries are increasingly clearly affected by the growing market share of Chinese goods in our own home market. In the last two years, Eurozone imports from China have grown by more than a third in volume. Many Chinese products are also becoming cheaper. This benefits consumers, who get goods more cheaply, and companies, for whom the price of production inputs imported from China is lower. On the other hand, it means that the competition from Chinese producers has become increasingly intense," said the central bank governor.

"According to the logic of a market economy, production in Europe that has lost its competitiveness should be discontinued," Müller said. "At the same time, recent history has shown that the complete decline of strategically important industries is not in Europe's interest, especially if it is driven by a price advantage achieved by Chinese competitors with government support. This realization becomes even more important when we recall recent examples where mutual dependence in international trade has been used as a tool of pressure to achieve other political goals. The question of how local producers can maintain their competitiveness not only in foreign markets but also at home is therefore topical both in Estonia and across Europe," Müller added.