How should policymakers deal with the economic impact of the energy crisis?

Newsletter: How should policymakers deal with the economic impact of the energy crisis?

Thursday, 28 April 2022

Funcas Europe

Hello Future is blue readers,

While the EU was just recovering from the pandemic, a new shock is escalating energy prices and supply bottlenecks. These adverse trends, which gathered momentum during last year, reached their climax with the invasion of Ukraine. 

The most spectacular impact of this new supply shock is a surge of inflation not seen in decades. Consumer prices were up 7,8% in March, with seven countries already recording double-digit rates and four more following closely. We are seeing an erosion in both enterprise profit margins and household real incomes, weakening the economic recovery and aggravating social inequalities. 

The space for policy response appears to be narrow, more challenging than was the case during the pandemic. Back then inflation was practically non-existent, thereby facilitating monetary policy accommodation, and budget deficits had been brought down as a result of the pre-covid expansion. 

Today, in view of the risk of second round inflation effects, the ECB is withdrawing its bond-buying programmes while paving the way to higher interest rates. Similarly, governments face the challenge of having to curb the impact of the shock while maintaining fiscal sustainability. For the EU as a whole, public debt has reached 88% of GDP, 10 points more than before the pandemic. 

Of course, there are also good news: the EU started the year on a relatively strong footing. Spain, for instance, has positive prospects of recovery in tourism. Also, the Next Generation programme appears to be even more relevant, in light of the need for an energy transition towards renewable sources. More fundamentally, Europe is becoming aware of the need for reinforcing its geopolitical role.

To get some answers to these critical challenges, we organised at Funcas a high level seminar that is now available on Youtube.

Don’t miss our high-level seminar on the economic impact of the energy crisis

Watch Klaus Regling, Managing Director of the European Stability Mechanism (ESM), Gonzalo García Andrés, Secretary of State for the Economy and Business Affairs, Ministry of Economic Affairs and Digital Transformation, and  Belén Carreño, Reuters Senior Correspondent analyse what are the policy options that are best suited to response to the energy crisis. 

Watch it

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What we are reading

Implications of Russia cutting gas to Poland and Bulgaria
Worthy Twitter thread from Nikos Tsafos with insights and key data.

A sanctions counter measure: gas payments to Russia in rubles
A requirement for gas to be paid for in rubles is a way for Russia to side-step central bank sanctions.

To make Moscow truly suffer, the sanctions screw must be tightened even further
«The exceptions and loopholes built into the latest tranche of sanctions confirm that only complete financial sanctions can end this war»

How to be smart about Russian energy sanctions
FT’s Martin Sandbu takes a look at the mechanics of a tax on Russian oil or gas imports. 

Have a nice rest of the week.

Raymond Torres
Funcas Europe Director

Funcas

Think tank dedicado a la investigación económica y social

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