High prices stifle the European economy and heighten fears of stagflation

2022 was supposed to turn the page on the economic crisis caused by the Covid-19 pandemic. This year the EU was supposed to write a new chapter of recovery and prosperity. Corn invasion of Ukraine Russia sweeps away all forecasts.

One month after the start of the warinflation the year in the euro area jumped to 7.5 % compared to 5.9% in February. This trend challenges the consensus of most analysts. Energy prices alone rose 44.7% year-on-year, a staggering rise from the 4.3% recorded in March 2021.

Businesses across the continent are getting incredibly high bills. This outbreak threatens to disrupt production and lead to plant closures. For households, the punishment is the same, they see their own purchasing power dive at record speed.

With Moscow showing no signs of abandoning its military campaign, uncertainty about the immediate future of the EU is only growing. Superposition price increasefrom supply chain disruptions And economic downturn are fueling fears of stagnation and an abrupt halt in the post-coronavirus recovery.

“Europe is entering a difficult phase. In the short term, we will face higher inflation and slower growth. There is great uncertainty about the magnitude of these effects and their duration.” explains Christine Lagarde, President of the European Central Bank (ECB).

The longer the war goes on, the higher the costs are likely to be.

These exceptional circumstances have placed European institutions and national governments under enormous pressure to provide quick and tangible solutions to workers and businesses before the scars grow too deep.

I’Spain A contingency plan was recently approved to mitigate the economic and social impact of the war in Ukraine. Plan mobilizes 16 billion euros public funds, including 6 billion euros in direct support and tax incentives.

The country is one of the hardest hit by a power shortage that has been going on for months. I’inflation in Spain reached last month 9.8%. The deterioration of the situation caused a 20-day strike in the transport sector. This mobilization led to food shortages in many supermarkets and supply difficulties for factories.

Politicians are rushing to offer relief measures, but the protracted fighting and the dramatic development of the war are prompting calls for tougher sanctions against Moscow. Fresh reports of killings in Bucha, a suburb northwest of Kyiv, are resurrecting the idea of ​​an embargo on Russian energy imports. This radical proposal will plunge the EU into even more economic chaos.

Germany, strong dependent on Russian gas and oil, is among the countries that are reluctant to accept such sanctions. Berlin believes the shock will be too severe for its economy.

German industry sees a risk that companies will face difficulties due to energy prices or due to the cessation of Russian exports of energy raw materials“, says Joachim Lang, CEO of BDI, Germany’s federation of industry, in a statement to Euronews.

Already, some energy-intensive companies are forced to curtail production due to exorbitant gas and electricity costs.

I’Germanyeconomic engine of the EU now faces recession risk”essentialwarns the council of wise men of the government. These economists are revising their forecasts downward growth for 2022 from 4.6% to 1.8%. They note that pre-pandemic levels will not be reached until the third quarter of this year.

In Lithuania, the EU country with the highest inflation rate (15.5% in March), companies are struggling to avoid losing competitiveness as raw materials from Ukraine, Russia and Belarus disappear and alternatives incur additional costs.

Russia’s invasion of Ukraine will add fuel to the already ongoing fire of inflation, and this fire could burn out all of Lithuania’s economic growth in 2022.Vidmantas Janulevičius, President of the Lithuanian Confederation of Industrialists (LPK), clarifies Euronews.

Shadow of stagflation

A dark turn of events inevitably brings back a scary ghost stagflationa period characterized by economic stagnation, high inflation and high unemployment.

The term “stagflation” originated in the 1970s when oil-producing countries declared embargoes following the Yom Kippur War. This decision caused an extraordinary increase in production costs. The crisis led to an oil shock that combined rising inflation and a recession in the economy.

Fifty years later, a new energy crisis threatens to reignite stagflation, even if it may be temporary.

It’s a nightmare because you have negative growth but high inflation at the same time. So you have to raise interest rates to fight high inflation, but you have to be very loose monetary policy because the economy is in a bad state.“, analysis for Euronews by Peter Vanden Hout, chief economist at ING Belgium.

For the time being, energy prices will remain quite high, given the uncertainty of supplies from Russia. In both the price of natural gas and the price of oil, there is a kind of “war premium” that will remain part of the price as long as this war lasts. And we have no idea how long this war will last“.

According to forecasts, the ECB may end its quantitative easing program in the summer and approve the first interest rate hike in the fourth quarter of this year.

However, recent economic indicators may speed up the timetable. “Upcoming data does not indicate significant risk of stagflation“, – explained Christine Lagarde in her speech before the publication of the inflation rate for March.

Additional risk

Inflation must be fueled looming food crisis World. Ukraine and Russia are considered the breadbaskets of the world, producing about 30% food staples such as wheat and corn.

Last week, David Beasley, director of the UN World Food Program, told the Security Council that the conflict in Ukraine would create “disaster on top of disaster“and could spark the worst global food crisis since World War II.

In Brussels, EU officials are trying to reassure citizens, stressing that food supplies are guaranteed but that medium-term measures are needed to avoid shortages. According to inflation data for March, food, alcohol and tobacco rose 5% year on year, compared with 4.2% in February. Unprocessed foods rose 7.8% due to seasonal factors and higher transportation and fertilizer costs.

food crisis, power shortage, supply chain disruptions and all the other potential consequences of the war in Ukraine portend a long and difficult journey for the European economy. In this context, inflation may no longer be a temporary phenomenon, as many predicted before the invasion. On the contrary, it can become a long-term problem.

We also have to consider that we will have some side effects now that energy and food prices are high. This may eventually affect other prices as well. High energy prices will also make other goods and services more expensive.“warns Peter Vanden Hout. According to him, the war in Ukraine”more of a game changer“than covid-19.

In general, let’s say that the decline in inflation will be a very slow process. We will probably have to wait until the second half of 2023 before we can talk about more normal inflation rates again.

Leave a Comment