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Germany once terrorised Europe, but now Europe is welcoming a resurgent German military.

By Balazs Koranyi SINTRA, Portugal (Reuters) -Europe should pool its defence investments since that would reduce cost, expedite the process and create a new safe financial asset that could bolster the international role of the euro currency, ECB policymaker Olli Rehn said. ECB President Christine Lagarde has argued that erratic U.S. economic policy creates room for the euro to take market share from the dollar on the global stage, but that would require the bloc to resume a long-stalled process to complete its financial architecture. Joint defence borrowing could bolster Europe’s and the euro’s prospects on two fronts: it would create a large, liquid safe asset required in the smooth functioning of the financial sector and would improve defence capabilities, a necessity for any bloc issuing a major reserve currency. "Defence is also an opportunity for creating another safe asset that could bolster Europe’s financial architecture," Rehn, Finland’s central bank governor, told Reuters. "If we deem that common defence spending is a public good, then we also need common solutions." While such spending would bolster already high national debt levels, the EU could possibly create a defence development bank to own some of the assets, so these do not burden national balance sheets, Rehn argued. Although Europe has long discussed moving on with its stalled financial integration, Rehn said that bold steps by the new German government give him hope that progress could finally be made. "I am encouraged by recent movements. The German decision to massively increase defence and infrastructure spending is pivotal," he said. "NATO countries’ decision to also boost spending will provide an important fiscal stimulus and increase growth." Europe should also set a clear timeline for finishing its savings and investment union, and look to complete the process by January 1, 2028, Rehn said. "The current environment represents an important moment for the euro and we shouldn’t waste it," he said. The ECB is already doing its part in the process and most importantly, it has finally achieved its price stability objective after a decade of under and overshooting it. The bank should now remain vigilant, since global economic turmoil risks creating inflation volatility and price growth could once again undershoot the 2% objective. "The exchange rate, energy prices, tariffs are all disinflationary and hold back economic growth, so we need to be mindful of the risk of inflation staying persistently below 2%," he said.

Investing.com -- The European Central Bank (ECB) has managed to align inflation with its 2% target, but the outlook remains uncertain amid ongoing fluctuations in foreign exchange and commodity markets, according to Governing Council member Gediminas Simkus, Bloomberg reported on Tuesday. Simkus, who also leads Lithuania’s central bank, warned that the recent surge in the euro’s value against the dollar and fluctuations in energy prices, fueled in part by tensions in the Middle East, could lead inflation to stray from the ECB’s target. He noted that there’s currently a greater chance of inflation falling short rather than exceeding the 2% goal. According to a Bloomberg survey of economists and Eurostat data, inflation in the euro area likely edged higher in June. Despite this, Simkus emphasized that the inflation outlook remains fragile. Speaking on the sidelines of the ECB’s annual gathering in Sintra, Portugal, he cautioned that there’s uncertainty about whether current projections will hold up. Although inflation is currently hovering around the 2% mark and ECB forecasts suggest it will remain stable through 2027 (after briefly dipping below that level next year), officials are grappling with persistent uncertainty. This stems from ongoing geopolitical instability and aggressive trade policies from the U.S. President Donald Trump, which are weighing on investor confidence in the dollar. As a result, the euro has appreciated rapidly, a trend that could reduce import costs while hurting the region’s export competitiveness, both of which could exert downward pressure on prices. Simkus flagged the unusual pace of the euro’s rise, stating that while the exchange rate isn’t historically extreme, the speed of the change warrants attention. With interest rates now considered neutral, neither stimulating nor slowing growth, Simkus said a rate pause at the ECB’s July meeting is the most probable outcome. This aligns with economists’ expectations that the ECB will deliver one final rate cut in September, following eight reductions since June 2024. Another major source of uncertainty is the trade relationship between the EU and the U.S., with negotiations underway ahead of a July 9 deadline. Simkus warned that even though Europe has shown resilience so far, most of the economic impact from existing U.S. tariffs, currently at 10% for many European goods, has yet to be fully felt.