The Russian-Ukrainian war means there will be no return to normality for Europe

German Chancellor Olaf Scholz, French President Emmanuel Macron and Polish President Andrzej Duda attend a news conference ahead of a Weimar Triangle meeting to discuss the ongoing Ukraine crisis, in Berlin, Germany, February 8, 2022.

Hannibal Hanschke | Reuters

The war in Ukraine and the ensuing economic sanctions imposed on Russia will bring far bigger changes to the European economy and markets than previous crises like the coronavirus pandemic, economists have said.

In light of Russia’s unprovoked invasion of Ukraine, European leaders have been forced to rapidly accelerate plans to reduce their overreliance on Russian energy. The European Parliament on Thursday called for an immediate and total embargo on Russian oil, coal, nuclear fuel and gas.

However, this aggressive decoupling comes at a price for Europe’s economy, pushing already high inflation to record highs and threatening to undermine the manufacturing recovery that began last year as economies struggled to emerge from the Covid pandemic. -19.

Carsten Brzeski, head of macroeconomic research at ING, noted last week that Europe was particularly at risk of losing its international competitiveness because of the war.

“For the continent, war is much more of a game-changer than the pandemic has ever been. I’m not just talking in terms of security and defense policies, but especially the whole economy,” he said. said Brzeski.

“The eurozone is now experiencing the reverse of its fundamental economic model, that of an export-oriented economy with a large industrial backbone and a greater dependence on energy imports.”

After benefiting from globalization and the division of labor over the past decades, the eurozone must now accelerate its green transition and its quest for energy autonomy, while increasing defense spending, digitalization and education. Brzeski called it a challenge that “can and indeed must succeed.”

“If and when it does, Europe should be well positioned. But the pressure on household finances and incomes will remain enormous until it gets there. Corporate profits, meanwhile, will will remain high,” he said.

“Europe is facing a humanitarian crisis and a major economic transition. The war is taking place in Europe’s ‘breadbasket’, a key production area for cereals and maize. Food prices will reach levels Higher inflation in developed economies could be a matter of life and death in developing economies.”

Brzeski concluded that financial markets were “misguided” as European equities tried to climb, adding that “there is no return to any kind of normalcy at this time.”

Debt sustainability issues

This tectonic shift for the European, and even global, economy will put additional pressure on central banks and governments caught between a rock and a hard place to juggle inflation and fiscal sustainability, economists acknowledge.

In a note on Thursday, BNP Paribas predicted that an acceleration of decarbonization, rising public spending and debt, more intense headwinds to globalization and higher inflationary pressures would be a lingering theme.

“This environment presents central banks with a more challenging environment in which to conduct policy and keep inflation on target, not only diminishing their ability to commit to a certain policy path, but making policy mistakes more likely.” , said Spyros Andreopoulos, senior European economist at BNP Paribas. .

He also noted that raising interest rates to curb inflation will eventually make life difficult for fiscal authorities.

“While not an immediate concern, particularly because governments have generally lengthened the average maturity of their debt in years of low interest rates, a more high could also change the fiscal calculus. Eventually, debt sustainability issues could resurface,” Andréopoulos said.

Low inflation throughout the euro area’s recent history has meant that the European Central Bank has never had to choose between fiscal sustainability and the pursuit of its inflation targets, as low inflation requires accommodative monetary policy which contributed to fiscal sustainability.

“Politically, the ECB was able – convincingly, in our view – to deflect accusations that it was helping governments by pointing the finger at weak inflation performance,” Andreopoulos said.

“This time around, the ECB needs to tighten policy to contain inflation amid even higher public debt, a legacy of the pandemic, and continued pressure on public funds.”

The Russian-Ukrainian war means there will be no return to normality for Europe

Source link The Russian-Ukrainian war means there will be no return to normality for Europe

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