The war in Ukraine is likely to worsen Europe’s economic problems

May 9, 2022
The war in Ukraine is likely to worsen Europe’s economic problems

European policymakers must devise ways to protect consumers and businesses from economic hardship resulting from the war in Ukraine. This PIIE Chart lays out short- and long-term effects of the war, difficulties including loss of exports to Russia, the fallout of sanctions, and the humanitarian crisis of dealing with millions of refugees.

More specifically, the shocks on supply chains from COVID-19 as well as the war may prompt EU adjustments in just-in-time delivery models that sacrifice efficiency. Disruptions of food supplies from  Russia and Ukraine, particularly wheat, are raising prices and causing shortages felt most acutely in developing economies, which could increase immigration to Europe from food-insecure regions. 

Europe's dependence on Russian energy varies across EU member states. An oil embargo like the one proposed by the European Commission should reduce Russian revenues. For gas, however, embargo is not a short-term option, and more targeted measures such as a tariff should be considered. The scramble to reduce EU dependency on Russian energy and find alternative suppliers will be costly and take time, requiring a faster transition to renewable sources. In the short term, consumers and firms will need protection from higher energy bills that does not undercut the efficacy of sanctions. Lumpsum transfers to low-income EU households are preferable to energy subsidies and can be financed through deficit spending. But policymakers need to be nimble as conditions change.

This PIIE Chart is adapted from Olivier Blanchard and Jean Pisani-Ferry's Policy Brief, Fiscal support and monetary vigilance: Economic policy implications of the Russia-Ukraine war for the European Union.
 

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