Ukraine war is slowing down Europe's economies

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The Ukraine war is depressing economic growth in the EU and driving up inflation. This is mainly due to energy prices. However, national debt in the EU countries is falling.

Turbine production at Siemens

The EU Commission has drastically revised its growth forecast for the European economy downwards because of the war in Ukraine. The economy of the EU and the euro countries will only grow by 2.7 percent this year instead of the four percent previously expected, according to the spring forecast presented in Brussels on Monday. The forecast for inflation in the euro countries in 2022 has almost doubled to 6.1 percent.

The Brussels authorities had already had to adjust their forecasts in their winter forecast in February, among other things because of the high energy prices and the omicron wave of the corona pandemic. The war in Ukraine and, above all, the persistently high prices for energy and other raw materials continue to exert pressure, as the commission announced. There would also be war-related disruptions in the supply chain.

For the coming year, the EU Commission is assuming 2.3 percent growth in the EU and the euro area. In her February forecast, she had predicted 2.8 percent for the EU and 2.7 percent for the euro countries in 2023.

Especially the increased energy prices are causing problems for households

Energy prices are driving inflation

In terms of inflation in the euro area, the forecast for the euro countries has almost doubled this year, from the previously forecast 3.5 to 6.1 percent on an annual average. This is mainly due to the high energy prices, it said. In 2023, inflation is expected to fall to 2.7 – still above the two percent targeted by the European Central Bank (ECB).

Before the war began, the Commission was still expecting an average of 1.7 percent in the coming year went out. In the EU as a whole, the Commission is even assuming average inflation of 6.8 percent this year and 3.2 percent next year.

Poor prospects for Germany

The forecast for the German economy was also corrected significantly, partly because of the Ukraine war. The EU Commission is only assuming growth of 1.6 percent for this year, instead of the previously expected 3.6 percent. Accordingly, Europe's largest economy will grow by 2.4 percent next year instead of the previously forecast 2.6 percent.

The Ukraine war also slows down the export of German machinery and equipment. Business expectations have clouded over as a result of the Ukraine war, VDMA chief economist Ralph Wiechers reported on Monday. “In addition, as a result of this and as a result of the lockdown in China, the problems in the supply chains have worsened, be it due to supply bottlenecks or longer delivery times.”

Ease in debt

Despite government costs as a result of the Ukraine war, the debt in the euro zone is falling, according to the EU Commission. According to the spring forecast, the national deficit in the entire currency area is likely to fall further to 3.7 percent in 2022 and to 2.5 percent next year.

In the first year of the corona virus, 2020, the state deficit jumped massively to a good seven percent due to the financial aid related to the pandemic and then fell to 5.1 percent in 2021. A strong job market and the ramp-up of the economy after the Corona crisis should support the national economies “and help to reduce public debt and deficits,” said EU Economic Commissioner Paolo Gentiloni.

The euro countries have some different packages have been put together to relieve companies and consumers of the sharp increase in energy prices. In addition, aid for refugees from Ukraine is driving up government spending. According to the forecast, the ratio of debt to economic power in the euro area is likely to fall to almost 95 percent in the current year and to almost 93 percent in 2023. But that would still be above the level before the pandemic crisis. This so-called debt ratio had reached a record high of 99.2 percent in 2020 and fell only slightly to just over 97 percent in 2021.

The EU debt rules were suspended in 2020 to give countries more leeway to deal with the consequences of the mitigate the pandemic. The rules in the Stability Pact stipulate that new debt is limited to three percent of economic output and total debt to 60 percent.

iw/hb (dpa, afp, rtr)