The Western sanctions against Russia are eating into the European economy and adding to stagflation risks.
The European Union (EU) has slapped five rounds of sanctions on Russia since the Ukrainian conflict erupted two months ago. The sanctions, which are aimed to cripple the Russian economy, have not achieved the desired effect. Instead, the blowback of the sanction measures is eating into the European economy, adding to stagflation risks.
In its latest round of sanctions, the EU has made up its mind to embargo coal imports from Russia and reduce its reliance on Russian oil and natural gas, which compounds the energy supply crunch in the bloc. As a result, natural gas prices have skyrocketed and are hovering on historical high levels in Europe. Some European countries are mulling burning more coal to generate electricity, a setback to Europe's ambitious green transformation.
According to the European Green Deal, the EU aims to drastically reduce emissions so that it can be climate neutral by 2050. Meanwhile, the EU is scrambling to secure energy supplies from other countries. Countries including Germany are gearing up for more imports of liquified natural gas (LNG) from the U.S. by building new LNG terminals and expanding storage facilities.
The EU efforts to wean itself from Russian energy has got it nowhere near energy independence now that the EU has to purchase more energy products from the United States and other countries at much higher costs. The full-blown impact of a complete embargo of Russian energy has made some European countries, especially Germany, quail.
Michael Vassiliadis, chairman of the Mining, Chemical and Energy Industrial Union in Germany, warned that tens of thousands of jobs will be put at risk if the natural gas supplies are cut off partly. Leonhard Birnbaum, chief executive of the utility company E.ON in Germany, said that the German economy will suffer massive damage without Russian natural gas imports.
The EU economic growth slowed down to 0.4 percent in the last quarter of 2021, as opposed to the over two percent growth in the previous two quarters. The conflict in Ukraine will inevitably aggravate the weak economic recovery in the bloc.
An analysis conducted by the Organization for Economic Cooperation and Development(OECD) in March indicated that the Ukraine crisis will knock 1.4 percent off the euro area economy in 2022. Inflation in Europe is running wild, largely due to the sanctions against Russia.
The inflation in the euro area hit a record high of 7.5 percent in March. The high inflation is ubiquitous among all the euro area countries. The readings in the three Baltic countries and Netherlands have even topped 10 percent.
The European Central Bank (ECB) recently revised up its projections of the euro area inflation to 5.1 percent in 2022. At the same time, the economic growth forecast has been lowered to 3.7 percent in 2022, 2.8 percent in 2023 and 1.6 percent in 2024. Market observers worry that stagflation might be just around the corner given that inflation will remain high for an extended period and the momentum of the economic growth is undermined.
Paolo Gentilon, the commissioner for economy in the European Commission, said that the 4 percent growth target for the euro area in 2022 looks unachievable as for now. The prospect of economic growth in the euro area will mainly depend on the duration of the Ukraine conflict, the possibility of enhanced energy supply and consumer confidence.
At a time when high inflation is rampant in the euro area, the ECB is expected to tame price hikes by winding down stimulus measures, which could risk damaging the fragile economic recovery. The ECB has repeatedly stated that supportive measures have helped to keep the euro area economy buoyant, which can partly explain the bank's reluctance to rush to taper down.
The divergence among member countries with regard to the ability to weather negative impacts and the imbalance of economic recovery mean that it is not an easy decision for the ECB to back out of its quantitative easing policies.
The EU is faced with a difficult task of reconciling fiscal discipline with economic growth. In a contingent arrangement to weather the pandemic impact, the EU countries have opened their coffers to keep economies afloat, leading to widened government deficit and debt, which have worsened due to the Ukraine crisis.
It is expected that the EU fiscal rules will be resurrected in 2023 and it will be difficult for many member countries to bring down their deficit and debt to an acceptable level within such a short time frame.