The war in Ukraine and the economic sanctions imposed on Russia will cause bigger shifts for Europe's economy and markets than previous crises, economists say.
European leaders have been forced to accelerate plans to reduce their dependence on Russian energy in the wake of the invasion of Ukraine. The European Parliament on Thursday called for an immediate and total embargo of Russian oil, coal, nuclear fuel and gas.
The European economy is at risk of being undermined by this aggressive decelerating because it will cause inflation to rise to record levels and undermine the manufacturing recovery that began last year.
Europe is at risk of losing international competitiveness as a result of the war according to ING Head of Global Macro Research.
The war is more of a game-changer than the previous one. Brzeski said that he was not just talking about security and defense policies but about the entire economy.
The eurozone is now experiencing the downside of its economic model, that of an export-oriented economy with a large industrial backbone and a higher dependency on energy imports.
The euro zone has benefited from globalization and the division of labor in recent decades, but now needs to ramp up its green transition and pursuit of energy independence, while at the same time boosting spending on defense, digitization and education. This is a challenge that can and must succeed, according to Brzeski.
Europe should be well-positioned if and when it does. The pressure on household finances and incomes will continue until it gets there. He said that corporate profits will remain high.
Europe is facing a humanitarian crisis. Europe is a key production area for grain and corn. Food prices will go up. Higher inflation in developed economies could be fatal in developing economies.
As European stocks attempt to grind higher, Brzeski concluded that there is no return to normal.
The shift in the global economy will put additional pressure on central banks and governments to balance inflation against fiscal solvency.
In a note Thursday, the bank predicted that a faster drive to decarbonize, higher government spending and debt, more intense headwinds to globalization and higher inflationary pressures would be an enduring theme.
This backdrop presents central banks with a more challenging environment in which to conduct policy and keep inflation on target, not only diminishing their ability to commit to a certain policy path but making policy mistakes more likely.
He said that raising interest rates will make life difficult for fiscal authorities.
While this is not an immediate concern, governments have generally lengthened the average maturity of their debt in the low interest rate years, so a higher interest rate environment may change the fiscal calculus as well. There could be debtsustainability concerns eventually.
The accommodative monetary policy of the European Central Bank aided fiscalsustainability since low inflation necessitated it.
In our view, the ECB was able to distract the public from the fact that it was helping governments by pointing to low inflation outcomes.
The European Central Bank is having to tighten policy to rein in inflation against the backdrop of higher public debt and continued pressures on the public purse.
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