Europe’s major money experts have acknowledged that the Russian invasion of Ukraine will have a negative impact on the European economy through the uncertainty it creates and the additional surge in energy prices it causes. However, they claim that this is the price to be paid for defending European values and they will act to mitigate this impact, especially for purchasing power.
“The defence of our values, of freedom, of the sovereignty of peoples has a price. It leads us to make political and economic decisions that are difficult”, said the French Finance Minister Bruno Le Maire, referring to the sanctions that the European Union was finalising on Friday 25 February (see other news and 12898/1). “We know that there will be economic costs” that will emerge “in the coming weeks and months” and that the impact will be “different for different Member States”, said Eurogroup president Paschal Donohoe.
“Few would have imagined that uncertainty would return through the door of war, which was thought to be closed forever”, noted European Central Bank President Christine Lagarde. She assured that the Frankfurt-based monetary institution was following the situation in Ukraine very closely and that it would assess the impact of the conflict on inflation by the time of the Governing Council’s decision-making meeting on Thursday 10 March.
Ms Lagarde also assured that the ECB stands ready to take whatever action is needed to fulfil its responsibilities to ensure price and financial stability in the euro area, reiterating the crisis language of ‘whatever it takes’. She highlighted the diversity of monetary policy options available to the ECB and vowed to use optionality and flexibility in setting monetary policy.
Regarding the uncertainty caused by the invasion, the former IMF Director noted a deterioration in financial markets without expecting “disorderly disruptions”.
At the beginning of February, the ECB President no longer ruled out the possibility of a rate hike following the completion of the massive government bond buyback operation, or PEPP’, which was initiated at the outbreak of the Covid-19 pandemic (see EUROPE 12883/17).
Responding to soaring energy prices
Another way the war in Europe will impact the European economy is the surge in energy prices, the main driver of rising inflation, which reached a record high of 5.1% in the eurozone in January. Gas, for which Russia accounts for 22.2% of the euro area’s imports, has seen its price increase sixfold in one year, while oil prices have risen by 54% over the same period, Ms Lagarde noted.
In a joint statement, the Ecofin Council, the European Commission and the ECB say they are “committed” to accelerate the work on increasing the EU’s economic “independence”, particularly in terms of energy.
On Wednesday 2 March, the Commission will present a Communication on a toolkit to respond to rising energy prices. Measures on joint gas procurement and strategic storage are planned, said Commission Executive Vice-President Valdis Dombrovskis (see EUROPE 12894/5). Noting that Norway had exceeded its maximum gas export quota, he said the EU needed to strengthen its resilience to possible market manipulation by Russia.
“We need to invest in energy security and diversification of supply”, not only through renewable energies, but also through the creation of gas production capacity, said German minister Christian Lindner. For him, “transport infrastructure in the EU needs to be improved so that liquid gas can be transported from Spain to northern Europe”, he said.
The Spanish minister, Nadia Calviño, reiterated Spain’s position in favour of a far-reaching reform of the energy market so that “the rise in gas and oil prices on international markets does not contaminate electricity prices”.
On fiscal policy, the Eurogroup, which advocates for a moderately expansionary fiscal stance in 2022, will identify in three weeks the appropriate response in such circumstances, based on a communication on the 2023 fiscal guidelines that the Commission will unveil on Wednesday 2 March.
See the joint statement by the Ecofin Council, the European Commission and the ECB: https://aeur.eu/f/IJ (Original version in French by Mathieu Bion with Anne Damiani)