European Commission Vice-President Valdis Dombrovskis noted on Thursday 24 February that Russia’s invasion of Ukraine “has shaken financial markets and increased economic uncertainty at a time when the EU economy is already facing several risks, such as rising energy prices and inflation”.
“Nevertheless, our economic fundamentals are strong”, he said at the EUROFI conference in Paris, with the EU economy having returned to its pre-Covid-19 pandemic level in less than two years and unemployment at a record low.
At this stage, the European Commission expects GDP to grow by 4% in the EU this year, after a rebound to 5.3% in 2021 (see EUROPE 12888/5). But these economic forecasts do not include the war in Eastern Europe.
“There are still many risks, and Russia’s unjustified invasion of Ukraine increases them greatly”, Dombrovskis said.
EU Finance Ministers will discuss the impact of the current crisis on the European economy on Friday 25 February in Paris (see other news).
The European Central Bank is also closely monitoring the impact of the war in Ukraine on the macroeconomic situation. As the single banking supervisor in the euro area, it has asked banks to assess, among other things, their exposure to technological risks related to cyber attacks.
While its president, Christine Lagarde, did not exclude, at the beginning of February, a rise in key rates in 2022 (after the end of the ‘PEPP’ operation of massive repurchase of public securities) because of the surge in inflation linked above all to the rise in energy prices (see EUROPE 12883/17), the Russian invasion is likely to change the situation.
The next decision-making meeting of the ECB Governing Council - which met face-to-face in Paris on Thursday for the first time since the outbreak of the pandemic - will take place on 10 March in Frankfurt.
On Thursday, European stock markets fell, mainly in those markets most exposed to the Russian market. On the other hand, the price of oil broke through the $100 a barrel mark, a level not seen since 2014.
New massive macro-financial assistance to Ukraine?
On Thursday, Dombrovskis said that “massive” new macro-financial assistance to Kiev was needed to respond to the new situation.
To response to Ukraine’s immediate needs, the EU has released a sixth tranche of aid in the amount of €1.2 billion in soft loans (see EUROPE 12892/11). However, according to the former Latvian Prime Minister, Ukraine’s needs amounted to €2.5 billion before the Russian military build-up on the Ukrainian border and €5 billion after the build-up (loss of investor confidence, more difficult access for Ukraine to financial markets, collapse of the Ukrainian currency and depletion of currency reserves).
“At the moment, the funding gap is out of scale”, Mr Dombrovskis added, convinced that the EU needs to support Ukraine “on a much larger scale”. (Original version in French by Mathieu Bion)