The war in Ukraine has increasingly serious consequences for the European economy. In its quarterly economic forecast, the European Commission has revised its growth forecast for next year considerably downwards. In May she still assumed 2.3 percent growth in 2023 for both the EU and the eurozone, now she is adjusting that to 1.5 and 1.4 percent respectively. Inflation expectations are also being revised considerably: Brussels now expects a record inflation of 7.6 percent in the eurozone for this year.
European Commissioner Valdis Dombrovskis (Finance) speaks of a ‘lasting long shadow’ that the war is casting over ‘Europe and our economy’. The effect of this on the global energy market and thus gas and oil prices in particular has major consequences for the European economy. The EU is still heavily dependent on fossil fuels from Russia, and peaking prices combined with falling supplies are hitting the economy hard. It is also inconvenient that Brussels emphasizes in the forecast that the situation could deteriorate significantly if the gas supply comes under further pressure. In a reaction, European Commissioner Paolo Gentiloni (Economics) emphasizes the “great uncertainty and downside risks” of the new forecast. The fact that Russia could turn off the gas tap completely is now a scenario that no one dares to rule out.
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High energy prices combined with sharply rising food prices are fueling record inflation in Europe. In comparison, in February, before the start of the war, Brussels assumed inflation of 3.9 percent for the EU, roughly half of the now forecast 8.3 percent. The Netherlands is still above this with an expected inflation of 9.3 percent. The hardest hit are Estonia and Lithuania: both countries are experiencing price increases of 17 percent this year, almost exclusively due to sky-high energy prices. In the third quarter of this year, inflation in the eurozone is expected to peak at 8.4 percent, before falling below 3 percent until the last quarter of next year.
For the Netherlands, the European Commission expects economic growth of 3.3 percent this year. Next year it will fall to 1 percent, where it was previously assumed that 1.6 percent in 2023. In the eurozone, only Italy performs worse. The economy there is expected to grow by only 0.9 percent next year.
Brussels sees dangers not only in prolonging the war in Ukraine. The corona pandemic also remains a “significant risk”. Not only because it could lead to new lockdowns again later this year, but also because extended strict corona measures in China could put further pressure on global supply chains. It is striking that Brussels also mentions the ongoing drought in southern Europe as a factor that could affect the economic outlook. In Italy in particular, the situation could affect agricultural production, pushing up food prices even further. As a result, climate change has now also become a direct economic risk factor in the EU itself.