The key to our economic future is Russian gas: in essence, it is the prediction of the European Commission in its latest economic outlook. All countries face a sharp post-summer slowdown, if not GDP declines that could last a quarter or two. Those most dependent on the Eurasian giant will be hit the hardest, but in an interconnected economy like Europe’s, no one is immune. Germany and Italy, for example, would grow just around 1%, while Spain, less exposed to the risk of a total cut in Russian gas supply, would grow slightly above 2, 1%, against 3.4% in the previous forecast. Activity, therefore, down and prices up for the same reason: soaring energy prices, the shock wave of which runs through the entire productive apparatus, causing more inflation.
The prognosis, though bleak in the short term, leaves the medium-term economic prospects outlined before the war largely intact. And it is that Brussels predicts that everything will improve when the price of the raw material stabilizes, thanks to the appearance of new alternatives to Russian hydrocarbons or a truce in hostilities in Ukraine. At this precise moment, inflation will fall – the Commission foresees a CPI YoY close to ECB’s 2% end-2023 target for the euro area average and the economy will resume a solid recovery path.
The Commission’s voluntarist outlook, however, eludes the essential role of economic policy in the face of the shock energetic. it depends on your management the survival of many companies which, although viable, need budgetary support to adapt and evolve towards a model less intensive in fossil fuels. European societies also threaten to be torn apart by the unequal nature of the crisis: the report confirms that the lowest income deciles are the most exposed to it, and households express growing unease at the loss of purchasing power salaries.
Brussels does not say how to face these challenges and at the same time respond to the objectives of correcting the imbalances of the public accounts weighed down by the cost of the pandemic. The answer undoubtedly lies in the gradual nature of the adjustments, but also in a combination of recalculation of spending priorities, flexibility in the use of European funds and budgetary rebalancing measures.
Another front of vital importance is monetary policy. The Brussels forecasts include the assumption of a gradual adjustment of interest rates. Something desirable, because overreacting would accentuate recessive tendencies. However, progressivity, apart from the fact that it is not guaranteed, does not seem compatible with the forecast of a sharp drop in inflation. It is better to prepare for the possibility of a longer lasting inflationary episode and at the same time reinforce social firewalls with income agreements. And the financiers, thanks to an effective anti-fragmentation instrument: on July 21, we should know the ECB’s proposal. Let’s hope he is up to it because, otherwise, the markets will soon put pressure on risk premia, that of an Italy weakened after Draghi’s resignation, but also ours.
Spanish families and businesses, after a difficult period of deleveraging, are better placed than during the financial crisis to resist the turn of monetary policy. Its financial situation is also comparable to the European average, or even better than some so-called frugal countries such as the Netherlands. But for the government, a gradual rise in interest rates will have a much more pronounced impact.
European Commissioner Paolo Gentiloni sums up the challenge by calling for a strategy of “solidarity, sustainability and security”. The time has come to reconcile these principles in the next general state budgets.
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