On July 21, the European Central Bank announced a 50 basis point increase in interest rates, effective from the 27th of this month. After years of ultra loose monetary policy, the European Central Bank raised interest rates for the first time in 11 years, 25 basis points higher than expected. Recently, the exchange rate of the euro against the US dollar once fell below parity, the downward pressure on the European economy has increased, and the adjustment of monetary policy and economic prospects have attracted much attention. High inflation is the primary problem facing the European economy at present, and it is also the direct reason for the policy shift of the European Central Bank. Since the middle of 2021, affected by the mismatch between supply and demand in the process of global economic recovery, the inflation rate in the eurozone has soared to 5% at the end of last year. Since the outbreak of the Ukrainian crisis, US and European sanctions against Russia have been escalating, the global supply chain has become more tense, and Europe, which is highly dependent on imports of energy and food, has experienced a more serious price shock. From February to June this year, the inflation rate in the eurozone rose from 5.1% to 8.6%, constantly breaking records, of which the year-on-year increase in energy prices rose from 31.7% to 41.9%. Although the overall inflation rate of the euro zone is slightly lower than that of the United States, the inflation rate of nearly 10 member countries has exceeded 10%, and that of Estonia, Lithuania and other Baltic countries has exceeded 20%. European economic recovery faces multiple pressures. In terms of consumption, high inflation has led to an increase in people's living costs, while eroding the real value of residents' savings, forcing people to reduce all kinds of consumer spending. In June, the final value of the euro zone consumer confidence index fell to -23.6, the lowest level since April 2020. In terms of investment, high inflation has raised the production costs of enterprises and compressed the profit space. In addition, the demand tends to be sluggish, and many enterprises are forced to reduce production or stop production. In June, the purchasing managers' index of manufacturing in the eurozone fell to 52.1, the lowest level since August 2020. In terms of net exports, due to the rising import prices of raw materials, the rising costs of manufacturing industry and the slowdown of external demand, the EU's foreign trade deficit has continued to expand this year, reaching 43.625 billion euros in May. From the perspective of international financial markets, the negative spillover effects caused by the strong dollar and the tightening monetary policy of the United States have spread to Europe. In order to deal with the current economic problems, in terms of monetary policy, in addition to this round of interest rate hikes, the European Central Bank has terminated net asset purchases on July 1, and said that it is expected to raise interest rates again in September. If the medium-term inflation continues or worsens, the rate hike will be appropriately increased. The German Chamber of Commerce and industry said that although the decision of the European Central Bank was not enough to eliminate imported inflation, if interest rates were not raised, the exchange rate of the euro against the US dollar would be weaker, exacerbating the rise in energy prices. But at the same time, we should also note that tightening monetary policy may also inhibit economic growth, raise the refinancing interest rate of high debt member countries, and then push up the risk of turbulence in the debt market. In terms of fiscal policy, after the large-scale economic and social assistance after the COVID-19, the current government debt of European countries is at an all-time high. At the end of 2021, the government debt of the European Union and the euro zone accounted for 88.1% and 95.6% of gross domestic product (GDP), respectively, exceeding the red line of 60%. Most analysts believe that there is limited room for European countries to boost their economies through fiscal expansion in the future. On the whole, considering that the current European "next generation EU" revitalization plan and some investment projects of green and digital "double transformation" are being promoted, the recovery momentum in the first quarter is also relatively strong, and it is expected that the economy will still achieve positive growth throughout the year. On July 14, the European Commission lowered its GDP growth forecast for the euro zone in 2022 to 2.6% and next year to 1.4%. In the future, the EU and the eurozone may further use policy tools to deal with the current difficulties according to the changes in the situation. (Xinhua News Agency)