Eurozone economy will eventually integrate the consequences of the war

Following her speech on March 17, the president of the European Central Bank (ECB) confirmed on Monday at a conference at the Montaigne Institute that she does not foresee a recession or stagflation in the eurozone, even under the worst-case scenario. rising prices and a boycott of Russian gas and oil. Continued optimism despite the lack of progress towards a ceasefire in Ukraine. Most economists believe that since the March 10 monetary meeting, the Frankfurt Institute’s “central” scenario has largely underestimated the impact of the war on economic growth, which will remain at 3.7% (up from 4.2% previously) at 5.1%. % inflation in 2022. They are more likely to count on a lost percentage point, at best, about 3% growth.

“The ECB is reasoning given the ‘growth boost’ associated with the 2021 trajectory of around 2% at the end of December. This means that average annual GDP growth in the euro area has fallen by 1.5 to 2 points compared to previous forecasts for 2022, our assumption in the stagnation scenario would mean several quarters close to or in recession, with inflation still at a level of more than 5%, recalls Thierry Apotheker, president of research firm Tac Economics. “At -0.3% in the fourth quarter, Germany, highly dependent on Russian energy and the Chinese economy, could quickly find itself in a technical recession, and the eurozone will have to count on -0.6% of GDP just by stopping exports. to Russia”, says Mathieu Savary, Europe Strategist at BCA Research.

On March 14, Natixis economist Patrick Artus did not hesitate to talk about switching to “war economy” which he defines in four points: “In wartime, government spending increases, there is a shortage effect on certain products and, consequently, additional inflation. But the central bank does not necessarily care about this, and the roles are changing as it is the state that tries to soften the “shock.” he pointed out, even giving a diagram “Modern monetary theory(MMT), where fiscal policy takes precedence over monetary policy.

At the national or pan-European level, the States will put their hands in their pockets. “Although the Russian risk has ‘crystallized’, we are already seeing how states resume public spending with the need to ‘remilitarize’ to meet NATO standards (2% of GDP) and diversify energy supplies. confirms Mathieu Savary. Even if the European Union (EU) manages to replace Russian gas with liquefied natural gas (LNG), this will require large investments in port regasification capacities. 53 billion has already been added to the budgets of Germany (12 billion euros in 2022, excluding defense funds of 100 billion), France (26), Italy (9) and Spain (6). Or 0.5% of their combined GDP, according to Goldman Sachs, for which that extra spending would be 1.1% of GDP this year.

Unlike Ukraine and Russia, “The EU has not yet entered into a “war economy”, which is to do everything possible to fight the enemy, with a complete embargo on trade (including gas and oil), huge military spending, a completely redirected production effort in this direction. , and a national card (even if we are already talking about it in Germany)”, Nuance Slim Suissy, Research Lecturer at the University of Caen. “The state is not yet imposing all this, and therefore we are rather in an “economic war”, adds Thierry Apotheker.

What about the impact on public debt? “Another feature of the ‘war economy’ is inflation or the ‘inflation tax’ – insofar as it refers to the depreciation of the currency – which historically makes it possible to finance spending, continues Patrick Artus. Starting with inflation at 4% at nominal rates around 0%, this would increase GDP and reduce the real cost of debt by about the same amount, allowing governments to post up to 8% of deficit/GDP without worsening the debt/GDP ratio. “.

Why is the ECB maintaining its line, which some see as tough? In addition to the victory of more strict (“hawks”) governors over more accommodating (“doves”), “We can think that she prefers to keep the optimism in the vision so as not to add to the surrounding pessimism, which can have self-fulfilling effects. On the other hand, she would like to have a better understanding of the absence of “second round” effects (price-wage loops) in the euro area, so as not to give the impression of capitulation to inflation.” continues Mathieu Savary. “In this sense, it is still and primarily concerned about inflation, and this is a matter of the authority it needs,” justifies Thierry Apotheker. Once the ECB has more accurate data on the nature of inflation and growth, it will be able to use monetary policy. “optional, gradual and flexible”, According to Christine Lagarde, this flexibility can be achieved through existing or new tools.

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