The Russian war against Ukraine will have significant economic effects on the European Union and its member states. How can we measure the precise consequences of the ongoing war for the European economy, and what does this mean for the EU’s path of economic integration going forward?

On March 16, 2022, the Bertelsmann Stiftung organized a webinar to approach these questions. Katharina Gnath, Senior Project Manager and expert for European economic governance moderated the discussion with Julia Friedlander, C. Boyden Gray Senior Fellow & Director, Economic Statecraft Initiative GeoEconomics Center at the Atlantic Council in Washington, DC, Nils Redeker, Policy Fellow at Jacques Delors Centre of the Hertie School in Berlin, and John Springford, Deputy Director of Centre for European Reform in London. The recording and a summary of the discussion can be found below.

Economic and financial sanctions

Since the start of the Russian invasion, the European Union, the United States, and Western Allies have ramped up economic and financial sanctions on Russia, rendering it the most heavily sanctioned country in the world. Julia Friedlander highlighted the degree of pace and severity with which those sanctions have been implemented – a singularity in modern history. She called these sanctions an outright financial “act of war,” designed to purposefully bankrupt Russia. With an unprecedented determination, the G7 froze 60% of Russia’s foreign exchange reserves overnight.

The effects of the sanctions were already palpable, as many Western companies had withdrawn from Russia because of the country effectively becoming an uninvestable jurisdiction. And while applauding the united stance of the European countries, Julia Friedlander drew attention to the fact that the sanctions would also produce strong repercussions for the EU. Therefore, understanding Europe’s own vulnerabilities was a key point when contemplating further measures.

Energy imports

John Springford picked up on this point by arguing that effective sanctions needed to be designed in a way as to target Russia, with as little negative impact as possible for the EU, protecting particularly vulnerable households and living costs. He pointed out that sanctions could only be effective if they inflicted “more pain on the enemy than on you.”

According to John Springford, Europe was not ready yet to ban all energy imports from Russia without suffering incalculable economic disruptions. It was more likely that we see a “medium-term squeeze” of energy imports. And as Julia Friedlander put it, reducing Russian oil imports would naturally shift oil dependency towards other authoritarian states, thus creating another dilemma for the Western democratic world.

The panellists agreed that energy security would now preoccupy European policymakers for years to come. We are witnessing increased social and economic uncertainty because of deteriorating energy supply chains.

Variation in EU exposure

Nils Redeker pointed out that there was considerable variation in the exposure of EU countries towards these challenges that arise from the Russian invasion. For example, households would bear stronger economic consequences in countries with higher private energy expenses and higher energy import shares. This held especially true for the poorer and colder central and eastern European states. The same also applied for costs of trade disruptions caused by cutting economic ties with Russia.

As for now, energy embargos were not part of the Western sanctions package, but a further escalation of the war could raise the stakes for European policymakers to follow the United States and the United Kingdom in banning oil – or even gas – imports from Russia. Such a supply-side shock would certainly further aggravate the current economic downturn in Europe.

Fiscal and monetary policy

In light of these developments, European monetary and fiscal policymaking was being put to the test again, and the implications could this time be quite different than during the covid pandemic. Nils Redeker pointed out that the current economic downturn was fuelled by persistent and aggravating supply shocks, and we would likely have to accept permanent higher energy prices.

While the covid crisis compelled a general fiscal stimulus to get the economy back on track, this time, we could not just “pick it up where we left it” after the war, and economic policy had now to be much better targeted. Monetary policy, for instance, was already heavily constrained by high inflation rates, triggering stagflation fears.

John Springford acknowledged that the role of fiscal policy would thus be even more crucial. He drew attention to two main channels through which fiscal policy is required to act: On the one hand, redistribution to prevent higher poverty rates was currently being discussed primarily in the form of fuel and energy subsidies. Secondly, we needed pronounced public investment into security and climate as key public goods.

Questions remained on the EU’s approach to these challenges. As of now, EU leaders are still reluctant to return to supranational funding schemes as they did during the covid crisis. However, if member states were left on their own to finance investment and redistribution through borrowing, there would be a danger of increasing divergence in spread levels and a subsequent return of the north-south divide. This would, in turn, make it difficult for the European Central Bank to pursue effective policymaking and especially to normalize inflation.

European solidarity

In this context, Nils Redeker stressed the importance of unity between member states. Economic costs will have to be shared in a way to prevent further divergence tendencies, and investment into common goods should be carried out together. Only if European solidarity prevails will it be possible to maintain a common strong position in the face of this geopolitical crisis and its economic ramifications.

The panel agreed that the direct economic consequences of the war on Ukraine are still difficult to grasp. Yet they insisted that it was safe to say that the invasion would mark a turning point in thinking about Europe’s economic model and risk-sharing within the EU. Sooner rather than later, crucial decisions will have to happen to determine how to go forward.

Contact: Katharina Gnath

About the author

Katharina Gnath is Senior Project Manager at the Bertelsmann Stiftung. She is an expert on European and international economic governance and is in charge of the foundation’s work on the European economy. 

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Read more about the geopolitical and economic impact of Russia’s invasion of Ukraine:

From Ambiguity to Adaptation: How to Shift Gears in EU-Ukrainian Relations

The Impact of the War Against Ukraine on the European Fiscal Reform Debate

Agricultural Production in Ukraine and Russia: Economic Implications for Europe

Europe’s divided security

What are the economic implications for the Russian and European economies? The Russian war against Ukraine

SWIFT exclusion is fine, sanctioning the Russian Central Bank is better

Caught between Russia and the West? China’s Struggle for a Position on Ukraine

Russian Sanctions Highlight Need for Green Transition for European Energy Independence

 

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