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What Russia-Ukraine War Means for Europe’s Economy

The war in Ukraine and the economic sanctions imposed on Russia will cause much bigger shocks to the European economy and markets than previous crises; such as the coronavirus pandemic. Amid Russia’s unprovoked invasion of Ukraine; European leaders have been forced to speed up plans to reduce their dependence on Russian energy. On Thursday, the European Parliament called for an immediate and complete embargo on Russian oil, nuclear fuel, coal, and gas.

However, this aggressive separation has a price for the European economy. This even leads to high inflation to record levels and threatens to restore production, which began last year; When economies tried to re-emerge from the Covid-19 pandemic. According to the head of ING Global Macro Research, the war for the continent is much more volatile than a pandemic has ever been. This applies to security and defense policy and the economy as a whole.

The eurozone is now experiencing a disadvantage with its fundamental economic model, the export-oriented economy; with an extensive industrial backbone and a higher dependence on energy imports.

To reap the benefits of globalization and redistribution of labor in recent decades; the eurozone must now step up its green transition and strive for energy autonomy and increase spending on defense, digitalization, and education. When that happens, Europe must be well-positioned. However, the pressure on household finances and incomes will remain high until it reaches that point. At the same time, corporate profits will remain high.

Europe is facing a humanitarian crisis and a significant economic transformation. The war takes place in Europe’s “breadbasket,” a key corn and grain production area. Food prices will rise to unprecedented levels. Higher inflation in developed economies can be a matter of life and death. “According to experts, there is currently no return to normalcy for the European economy.”

Russia’s invasion of Ukraine will put additional pressure on central banks and governments for a European and, indeed, global economy. They find themselves in the middle of a rock and a complex place in the fight against the fiscal resilience of inflation. According to BNP Paribas, a constant theme is faster acceleration towards decarbonization; higher government spending and debt, more intense resistance to globalization, and higher inflationary pressures.

This creates a more challenging environment for central banks to conduct policy and keep inflation at a targeted level, reducing their ability to pursue specific policies and making policy mistakes. Also, rising interest rates to curb inflation will ultimately complicate the life of the fiscal government.

Although this is not an immediate concern, at least because governments have generally extended the average debt maturity in years of low-interest rates, Higher interest rates may also change the fiscal calculation. Eventually, debt sustainability concerns may re-emerge.

Low inflation in recent Eurozone history has meant that the European Central Bank has never been forced to choose between fiscal sustainability and inflation targets. Low inflation has prompted a calming monetary policy that has helped budgetary sustainability. This time, the ECB has to tighten its policy of curbing inflation amid even higher public debt, a pandemic legacy, and constant pressure on public funds.

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