The text discusses the significant impact of Russia's invasion of Ukraine and subsequent Western sanctions on the global economy, causing one of the three most severe economic slowdowns globally in almost 50 years. The war has also been associated with the third fastest inflation rise since the 1980s, leading to central banks' strong reactions and an end to over a decade of cheap money. The document highlights that while the economic downturn predictions seem unlikely due to good weather preventing energy rationing in Europe, the full extent of the economic impacts is still unfolding.
Inflationary pressures are anticipated to continue due to ongoing effects of sanctions and changes in trade flows and investment after the invasion. The US is not expected to use its strategic crude reserves as actively as it did to compensate for the absence of Russian oil. The full consequences of new sanctions and the impact on countries like China, which will increase natural gas replenishment, are yet to be seen.
Governments will face more challenging economic policy decisions due to higher budget constraints and new spending commitments, such as supporting industrial policies to boost strategic autonomy, increasing defense spending, and providing aid to Ukraine. There is uncertainty about how the West will contribute to managing debt crises in emerging markets versus leaving the initiative to other global actors.
Alternative strategies include increasing revenues, which can be achieved through inflationary effects reducing public debt ratios by increasing tax revenues, but this could become an illusion if inflation decreases and growth returns to pre-pandemic levels. Alternatively, governments might consider raising taxes, although this may face resistance from the middle class, especially in Spain where the next election is near.
Another option is common European debt, which the EU has some room for. However, there is significant disagreement among European countries about its purpose, whether to finance arms deliveries to Ukraine, future reconstruction efforts, or support EU industrial policy. Concerns about the duration and implementation of such measures exist. This scenario would favor integration and discussions around a shared treasury, common fiscal policy, and better use of funds, potentially promoting cooperation within the EU in defense matters. Additionally, a new European fund could help ease tensions between member states resulting from the relaxation of state aid rules and the asymmetry caused by their distribution based on each country's fiscal capacity.
In conclusion, given reduced resources and increased spending commitments, governments will find it increasingly difficult to avoid discussing the economic policy implications of the Ukraine conflict in public debates.
