From fiscal reforms to wage growth to inflation; these are three significant challenges for the eurozone in 2022, according to economists at ING.

Still no fiscal reforms but silent power shift towards Brussels

“We do not expect changes to the numerical fiscal rules but a shift towards a more pragmatic country-specific approach, balancing between debt sustainability and the need for investments. In the meantime, the frontloading of investments planned by the new German government will find many eurozone followers, postponing any austerity to 2023.”

Expect a rebound in wage growth for 2022

“Labour shortages have returned far quicker than expected, improving workers’ bargaining power. The soaring inflation rate has already and will continue to result in higher wage demands from unions, while countries with inflation indexation will automatically see wages rise. Finally, strong profits give corporates room to increase salaries. We expect an increase to 3-3.5% in 2022, which is above the peak seen in 2019.”

Inflation will fall below 2%, but the ECB’s medium-term target will be met

“We agree with the ECB that the disappearing effect from the German VAT increase in 2021, an improvement of supply chain disruptions and a more favourable base effect for energy prices are likely to push inflation towards 2% in the second half of 2022. However, the output gap in the eurozone will turn positive next year and will be significantly marked in 2023 and beyond. The ECB’s staff forecasts from December 2022 are likely to show an inflation rate of around 2% over the forecasting horizon, a backdrop that would justify an initial rate hike in the first half of 2023.”