Many Chinese goods are cheaper, benefiting consumers and firms, but competition is intensifying, Müller, who is also an Ex-Officio Member of the Governing Council of the European Central Bank (ECB), went on.

We noted again on Thursday, at the Governing Council of the ECB, that interest rates are at an appropriate level, in view of the economic outlook. The euro area economy is still growing at a moderate pace and the labor market is strong. The latest statistics on the performance of the euro zone economy support the assessment that, for the foreseeable future, inflation will stabilize at close to 2 percent.

The start of the year has been eventful for foreign policy, and more abrupt price shifts have happened in currency, bond, and commodity markets. We learned that, for the U.S. president, trade agreements concluded last year with European countries are not final, and they may be reopened, in order to exert pressure.

U.S. threats towards Greenland and the removal of the president of Venezuela increased the general nervousness on the financial markets and served to undermine the reputation of U.S. securities as a reliable "safe haven" in turbulent times. The outcome has been a weakening of the dollar and a surge in precious metal prices, although some of that "froth" has been let out over the past week.

Investors who had placed assets in Japanese government bonds were also startled: The prime minister announced new elections, and the likelihood rose that the budget deficit would widen further still, even as Japan's debt burden is already substantial.

In Japan, interest rates have been on an upward curve for several years already, but as of the end of January, the bond market reacted particularly sharply to the news, and for the government, borrowing became overnight considerably costlier. This should also remind European governments that a high debt burden and a budget deficit reduce room for maneuver in shaping economic policy. Within the euro zone economy, in contrast, there have been no major surprises in the past couple of months, so consequently, the ECB's December forecast remains a good foundation for making interest rate decisions.

At the start of this year, inflation in the euro zone slowed even slightly more than expected, and in January, consumer prices in the euro area as a whole were only 1.7 percent higher than they had been a year earlier. Economic growth, in contrast, exceeded expectations at the end of last year. Over the year of 2025, the euro zone economy grew by 1.5 percent (for comparison: GDP growth in 2024 was 0.9 percent). According to surveys, euro zone companies also assess the near-term outlook for their businesses more optimistically than before.

So in the short term, a kind of equilibrium has seemingly been achieved in the euro zone economy: Inflation is close to the central bank's 2 percent goal, the economy as a whole is growing moderately, and interest rates are, when all things are considered, at an appropriate level.

Taking even a somewhat longer perspective, however, we should not feel too care-free. The estimated growth capacity of the euro zone economy, or in technical terms potential growth, has declined in recent years and will fall close to 1 percent in the coming years. This means that especially countries with larger budget deficits face very difficult choices.

It is no mean feat to bring the growth of the debt burden under control when population ageing at the same time automatically increases pension and healthcare spending, the number of people of working age is declining, and European countries also have to invest more in their defense capabilities. The future of the European economy will already in the coming years be influenced by how well we are able to adapt to the new reality in foreign trade. The question is not only about the tariffs imposed by the U.S. on goods from Europe and other countries, although that is of course important too, and has been getting 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 domestic market. Over the past two years, euro area imports from China have increased in volume by more than a third. Many Chinese products are at the same time becoming cheaper. Consumers benefit from this, as they receive goods at a lower price, and companies for whom the price of production inputs imported from China is lower. On the other hand, it means that the competition offered by Chinese producers has become ever more intense.

Following the logic of the market economy, European production which has lost competitiveness should be scrapped. At the same time, recent history has shown that a complete decline of strategically important sectors is not in Europe's interest, especially when behind this is a price advantage achieved, with government support, by competitors from China. This observation becomes even more important when we recall recent examples where in international trade, mutual dependence has started to be used as a means of pressure to achieve other political objectives.

The question as to how local producers can maintain their competitiveness not only in foreign markets but also at home is as a result topical both for Estonia and more broadly for Europe as a whole.

Editor's note: This commentary was originally published on the Bank of Estonia's blog.

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