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  • Writer's pictureanalysiswatch

Title: As Ukraine war drags on, Europe's economy succumbs to crisis

Aug 23, 2022 03:36AM ET

By: AnalysisWatch

It was supposed to be a stellar year for Europe.

The post-pandemic spending euphoria, backed by massive government spending, was supposed to drive the economy and help weary households regain a sense of normality after two terrible years.

But everything changed on 24 February, when Russia invaded Ukraine. Normality disappeared and the crisis became permanent.

Recession is now almost certain, inflation is approaching double digits and winter, with its looming energy shortages, is fast approaching.

While these prospects are bleak, they are likely to worsen before there is any significant improvement, and they will continue to worsen until 2023.

The change is dramatic. A year ago, most forecasters were predicting economic growth of nearly 5% for 2022. Now the baseline scenario is becoming a winter recession.

Households and businesses are suffering as the effects of war - high food and energy prices - are now compounded by devastating drought and low river levels that restrict transport.

Inflation in the Eurozone is running at 9%, a level not seen for more than half a century, which reduces purchasing power as more money is spent on petrol, gas and basic foodstuffs.

While the EU has unveiled plans to accelerate its switch to renewables and to decouple the bloc from Russian gas by 2027, making it more resilient in the long term, supply shortages are forcing it to aim for a 15% cut in gas consumption this year.

By contrast, the European Central Bank has raised rates only once, back to zero, and will proceed only cautiously, aware that an increase in borrowing costs for highly indebted Eurozone countries such as Italy, Spain and Greece could fuel concerns about their ability to continue paying their debts.

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