Brussels, Europe Brief News – A number of prominent leaders threatened that the Russia-Ukraine War could cause a recession and Economic Implications for EU. After analyzing different economic markets, even the IMF has stated that the War sets back economic recovery.
The War was a serious setback to Europe’s formidable yet incomplete recovery from the pandemic, leaving private consumption and investment well below pre-coronavirus forecasts.
Even the fiscal and monetary support underpinned a huge unemployment rebound almost to levels last seen before the pandemic. This current economic situation is taking energy and food prices to their all-time high.
The War on Ukraine has Major Economic Implications for the EU
The negative consequences of the War are major with the EU itself since the EU is neighboring the theatre of operations and has close economic ties with both Ukraine and Russia.
It also brings millions of refugees to the EU, unmatched since world war II. The European Commission has already dealt with these issues and continues to do so, at least on the energy front with the REPowerEU plan.
The War against Ukraine has been accompanied by a sharp rise in Inflation under the pressure of food, energy, and major commodity prices.
Inflation had already been rising throughout 2021 due to increased demand caused by the economic recovery and the continued disruption of many value chains, but the War has accelerated it.
And this movement has been more prominent in emerging and developing countries. Inflation hits most of the poorest and weakest and contributes to increasing inequalities worldwide.
War Caused a Rise in Inflation
The rise in inflation leads to significant increases in interest rates by central banks and tightening of monetary conditions. And again, this movement is even more marked in emerging and developing countries.
We have also experienced, in recent weeks, a rapid fall in share prices on financial markets and a spectacular loss of value in cryptocurrencies. This could easily trigger a new financial crisis all over Europe.
What should monetary and fiscal policymakers do? The War is a supply shock that reduces economic output and raises prices. Indeed, the Inflation is expected to increase to 5.5 percent in advanced economies and 9.3 percent in emerging European economies, excluding Russia, Turkey, and Ukraine.
Monetary policy must balance containing Inflation with the need to limit losses in output. Much of the pressure on prices Is driven by forces beyond central banks’ control, such as shocks to energy and food markets and supply chain disruptions.
However, the monetary policymakers in many countries should still stay the course of normalizing lending conditions to help contain inflation expectations and anchor domestic drivers of Inflation such as wages and housing rents.
The government is suggested to engage with partners to prevent wage-price spirals, including by making sufficient support available to households and firms that are struggling to afford more expensive commodities.
To deal with the supply shock, automatic fiscal stabilizers such as higher unemployment insurance and lower taxpayers should be allowed to operate freely.
Growth Downgrades in Europe
According to the IMF Regional Economic Outlook, it shows a lower growth for Europe. For advanced economies, they have cut the growth projections by 1 percentage point to 3 percent in 2022 from the January projection.
Emerging economies, excluding Russia and Ukraine, have cut projected growth by 1.5 percent points to 2.7 percent.
On the other hand, several major economies such as France, Germany, Italy, and the United Kingdom are projected to barely expand or even contract for two straight quarters this year.
Activity in Russia is forecast to shrink by 8.5 percent and in Ukraine by 35 percent which the President Putin blamed US and termed it “Economic War” against Russia.
Reconstruction Costs
Europe’s challenge will be to rebuild an economically strong Ukraine that encourages refugees to return. Rebuilding destroyed infrastructure will require extensive financing with a significant grant element.
Reconstruction and resettlement will help refugees return and economic growth rebound. Implementing reforms to strengthen institutions and public policy will maximize the growth dividend of reconstruction.
It will take time, and as a result, some who fled are likely to stay in host countries for a while. Integrating refugees, mostly women, and children, into jobs and schools will be important.
Targeted labor market policies, such as temporary wage subsidies to incentivize hiring, can help.
So too can facilitate skill recognition, providing language training, and fulfilling childcare needs.
Conclusion
The Russia-Ukraine war impacts the global economy, but European countries are facing numerous other issues. European countries are making significant funding, and accommodating refugees is forcing the rise in Inflation.
The whole world is battling Inflation as food and energy prices have gone sky-high. The solutions can only be applicable when the War stops. Until then, the condition is looking bleak for the Global economy.
