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The economic fallout of war in Ukraine will hit the European Union hard.
But the thorny questions of who exactly will suffer the most economic pain, and whether some of those costs will be shared, could trip up the bloc’s ability to stay unified against Russia.
For now, politicians have one message: It won’t be cheap, but it will be worth it.
“We are aware that this will entail costs for the European economy, but the answer is not to relieve pressure on Russia,” said Italy’s Prime Minister Mario Draghi on Thursday, as leaders gathered for an informal summit in Versailles. “The answer is to work together, support our economies, sustain the purchasing power of households, support our companies.”
To Italy and France, the preferred strategy is pooling some of those costs by issuing new EU debt to bolster energy security and defense. That’s a nonstarter for Germany, Sweden and the Netherlands, whose leaders pushed back strongly last week.
That pushback was strong enough that French President Emmanuel Macron opted at the summit to kick the EU debate over issuing more eurobonds down the road. But the broader issue of the economic impacts of war, and what the EU can do to try to contain the damage to the bloc’s fledging recovery, is still very live. On Monday and Tuesday, it will take up the attention of finance ministers as they meet in Brussels.
“There is a growing realization that there’s going to be some form of sharing of the economic costs of this crisis,” said Nils Redeker, author of a recent paper by the Jacques Delors Centre in Berlin that maps the war’s economic impact on the EU. “We will need to keep a united front toward Russia, and if it’s much more costly for some member states than for others, keeping this front is going to be more difficult.”
The other challenge is that uncertainty over the war’s course means it’s hard to put a price tag on possible remedies. But there’s no doubt the conflict and its spillover will make a sizable dent in output, say experts.
In one of the first major estimates of the war’s hit, the European Central Bank ratcheted down its growth forecast for the euro area to 3.7 percent, down by 0.7 percentage points from December, when it released its latest forecasts on Thursday. Others went further, including Goldman Sachs, which shaved 1.4 percentage points off its GDP estimate for the single currency area.
Insurance giant Allianz, meanwhile, is “looking at at least half a point to one point of GDP growth shaved off in Europe already,” according to its chief economist Ludovic Subran.
The Commission, for its part, is trying to avoid alarmism, stating that the war will impact growth in the EU but not derail it. But countries are speaking up and saying they’ll have to brace for the bill that the war will bring.
In a video meeting of EU finance ministers last week, Italy said it expects to cut growth by 0.7 percentage points due to disruptions to trade, the loss of Russia as an export market, and inflation, three diplomats told POLITICO. Cyprus, which relies on tourism for 20 percent of its GDP, is also likely to forgo a large share of revenues, as Russians make up a fifth of its visitors.
Bulgaria, meanwhile, has asked the Commission to run a “Chernobyl scenario” under which a nuclear disaster in Ukraine would destroy much of its agricultural output, diplomats said.
“It hits everyone, it’s an external shock, but it’s asymmetric in its consequences,” is how Redeker summed it up.
Weaponized interdependence
The clearest consequence concerns Europe’s dependency on Russian gas. The EU gets about 40 percent of its total gas imports from Russia, but for Austria, Hungary, Poland, it’s as high as 80 percent — and 100 percent in Bulgaria, Estonia and Latvia. Germany and Italy, the largest gas importers in the bloc, rely on Russia for over half and a third of their gas, respectively, so any shock in supply would have severe consequences there.
Even outside of the war’s disruptions, surging gas prices have brought electricity prices along with them because of the so-called marginal pricing system used in the EU. Earlier this month, they breached the record-high level of €200 per megawatt hour. This is particularly punishing for countries with cold winters and high “energy poverty” rates, such as much of Central and Eastern Europe. But energy-intensive economies, like Finland and the Benelux countries, are also hard hit.
Other ripple effects could also be felt through trade. Trade with Russia makes up a small portion of total trade with the EU, but it does provide a large number of raw materials to the bloc, and specific dependencies could wreak havoc in supply chains. Russian wood makes up half of Finland’s imports, while palladium — of which Russia controls 40 percent of global production — is a key input for the automotive sector in Germany and Italy.
Another key commodity is wheat — given that Russia and Ukraine are the first and fifth largest exporters of grain worldwide, respectively — where prices have jumped to a 14-year high over fears for global supplies.
Then there’s inflation, which is also likely to rise further and remain higher for longer than expected. Those pressures compelled the ECB on Thursday to announce faster tapering of its bond-buying program. A major driver of inflation continues to be energy inflation, where no relief is in sight. A barrel of Brent oil traded at above $120 a barrel on Wednesday, levels not seen since 2008, before falling to $109 on Monday.
“If we have $150 per barrel, or €200 for [megawatt hour] for gas, we’re talking about 6 percent inflation for the eurozone,” said Subran, from Allianz. “There is not a full fledged headline recession. But it is very costly on the production sector, and maybe more costly on some countries than others.”
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