Until June 2022, the inflation rate in the European Union was 9.6%, prices in Estonia with the highest inflation rate of 22% were increasing with the quickest record high. On the other side, the inflation rate in Malta was the lowest during the month at 6.1% in the EU. The present inflation rate in the European Union is the highest than ever. Following the sudden shock of the outbreak of Covid-19 in 2020, the economic reopening of Europe in 2021 was one of the factors that caused skyrocketing prices during the recent months; in a way that global supply chain has not been disentangled and recovered from production problems, travel restrictions and problems of labor force originated from the pandemic. In the meantime, the unprecedented increase of energy costs has only helped intensification of supply problems, especially in transport field which experienced the highest inflation rate in December 2021 among other sectors, throughout the European Union.
As indicated by statistics, the unprecedented price of energy has caused the remarkable growth of inflation rate among Eurozone countries. According to figures published by Eurostat, the EU Statistics agency, show that almost half of 19 countries of Eurozone have an annual double digit inflation rate at present. Many of the Eurozone countries depend on Russia as the main source of supply for fossil fuels in their industry and their home consumption. This is the case while the energy, especially the natural gas imported to Europe from Russia, has reduced more than a half since the Russian invasion of Ukraine on February 24, 2022, and have increased the prices to unprecedented (high) levels, and thus, have made the European governments to make effort for finding alternative sources of supply.
But the situation varies from country to country among Eurozone members. Although the inflation reduced slightly during June in Germany and the Netherlands, but Spain registered a high record that shows for the first time, it has reached a double digit figure since 1985. Despite their differences, all of these countries have been impressed, in a way or the other, the effects of inflation and skyrocketing energy prices which hit 41.9% in June 2022, i.e. triple times more than the same time last year. Likewise, prices of foodstuffs with an average increase of 8.9% during the last year have had noticeable jump.
Having relied on provided statistics about inflation, one can predict that higher prices will lead to the demand for higher wages by workers, which can tip the inflation to an even higher rate and thus put more pressure on interest rates. In view of the unpredictability of Ukraine developments, and also Covid -19, there are lots of ambiguities on the status of economic situation and inflation rate in Eurozone within the coming months. It is because of economic insecurity which is very high at the present. Therefore, the European Central Bank is on the horns of a dilemma: it should either do something about the high inflation rate, or to keep on with high flexibility in order to show reaction to another crisis.
The main reason for the present pressure of prices in the Eurozone is, to a large extent, the shock caused by energy and foodstuffs price rise. If the European Central Bank shows reaction towards high inflation rate hesitantly, there is a risk that inflationary expectations of companies, trade unions and consumers will increase constantly. In that case, prices and wages will be increased on this basis. To face with high inflation rate, workers and trade unions can demand for sharp increase of wages, which in its turn, may lead to the increase of inflation rate and ultimately, remarkable economic sufferings. Real wages and consequently purchase power reduced considerably during 2020 and 2021. Probably, the situation will not be different this year too.
According to opinion poll carried out by IFO Institute, wages in Germany will probably increase by 4.7% while the average price increase is more than 6%. As inflation remains at high rate for longer period, there will be more pressures by employees for adjustment of wages in order to maintain their purchase power. Having regarded the fact that due to the war in Ukraine, the inflation rate will probably remain high for a while, adjustment of wages can leave a stabilizing effect on the whole economy. Because real wage reduction means that the purchase power of consumers and consequently the demand, is reducing. Then companies will sell less and consequently they can pay less wages or even they may have to lay off a part of their staffs. Therefore, wage increase based on productivity and relevant expenses, is reasonable from economic policies point of view.
In general, in economic filed, inflation will become a factor to instability. Having regarded that the inflation rate has increased in Europe, it will leave a meaningful effect on existing insecurity and fear of future among economic activists and members of society in this field. Likewise, probable recession or super-recession, unemployment rate variant, purchase power, social welfare, and even crime and criminal rates will be increased. Therefore, in short term, it can also impress the national security of Eurozone countries.
National security has economic roots too; undoubtedly, the social side effects and repercussions of high inflation may interfere building and feeling of national security, the lack of which will slow the creation of security feeling or may prevent this to realize. Based on this, identification of factors and elements of providing national security (or in another words social security) and feeling economic security are considered to be among the essential pre-conditions for planning in order to promote the national security level, and plays a high role in strategic plans of states to fight against injustice and lacking of a share in economic cake.