The European economy victim of the war in Ukraine
Two weeks after Russia began Europe’s biggest conflict since World War II, businesses across the continent are already in various stages of desperation over the impact on livelihoods.
A crisis of human suffering in Ukraine, whose wider economic impact prompted European Central Bank officials to accelerate their withdrawal from the stimulus this week, is affecting the prosperity of Spanish farmland in Germany’s euro zone manufacturing heartland. and in France.
Soaring energy costs are the main complaint, although disrupted supply chains, sanctions and worries about an impending drop in demand are also weighing on businesses. The brutal shock of the nearby war, combined with widespread effects and an uncertain duration, will put pressure on governments to soften the blow and test their resolve to confront Russia.
The root of the difficulty is the European Union’s dependence on Ukraine for more than half of its supply of maize, a key source of feed for pigs. With farmers unable to access fields, analysts are slashing crop and export prospects by a third, sending prices to their highest in about a decade.
Other economic disruptions are inflicted by the geography of the crisis.
In Germany, the heart of the eurozone economy, Porsche has halted production of its Taycan electric car in Stuttgart because it lacks Ukrainian-made cable trees. Meanwhile, its parent company, Volkswagen, halted exports to Russia and halted production at a car plant in Kaluga, near Moscow.
The heaviest is the energy impact. If current prices persist, the additional cost of importing gas and oil will represent an income shock of $605 billion or 4.5% of annual gross domestic product, according to JPMorgan economist Greg Fuzesi.
Goldman Sachs expects inflation to hit 8% and the Eurozone to contract in the second quarter.
For many eurozone companies, this pinch was immediately crippling. Just in December, Manuel Rodriguez’s Kramer Group took over a century-old porcelain factory in eastern France called Jurassienne de Céramique Française. He has now made the decision to put it into hibernation.
“If we were to pay a gas bill multiplied by 10, we would hit the wall,” he said. “We would have no choice but to file for bankruptcy and close the plant.”
Heading south along the Italian coast, soaring fuel prices have also kept many trawlers out of the sea and sparked a week-long fishing boat strike. Carlo Lista, owner of a fish shop in the Roman quarter of Monteverde, says the effect has been dramatic.
“About 80% of fishing boats have stopped due to soaring fuel prices,” he said. “You go over there, and it might be a boat, and one guy bids, and then another guy. And the price goes up, whoever bids the most wins the fish. The prices skyrocket.”
The fishermen are calling on the Italian government to do something beyond the 16 billion euros already spent to protect consumers and businesses from rising energy costs.
This is a plea that echoes across the continent.
In Spain, Prime Minister Pedro Sanchez has already extended a series of energy tax breaks until the end of June. Portugal will reduce fuel taxes from Friday, and other counterparts are likely to take similar steps.
With the EU also under pressure to act, leaders discuss the energy crisis in Versailles on Friday. One measure the bloc could consider would be to temporarily lift the import ban on GM grains from the United States and South America to help farmers struggling with supply disruptions, according to the Spanish minister. of Agriculture, Luis Planas.
“If the gas supply is cut, Germany and Eastern Europe will almost certainly take a production hit, pushing the eurozone into recession,” wrote Maeva Cousin and Jamie Rush of Bloomberg Economics. in a report.
The political impact of the cost-of-living squeeze is likely to test the continent’s resolve to continue to confront Russia at a time when its President, Vladimir Putin, is threatening to cut gas supplies representing about a third of EU consumption.
“It’s a sword of Damocles,” said Yves Dubief, whose grandfather founded textile weaver Tenthorey, an employer of 50 in northeastern France that produces 5 million meters of fabric a year. .
In such circumstances, the business leader says the state should relaunch the measures used during covid-19 to need help with fixed costs and furloughed workers.
“If there is an embargo and we have to reduce our production, regardless of the price of gas, it will be a question of whether we are compensated by the public authorities,” Dubief said.
While such challenges are likely to focus governments in the coming weeks, the most immediate task of dealing with the economic fallout has been left to European Central Bank President Christine Lagarde.
Officials accelerated the withdrawal of the stimulus on Thursday by releasing forecasts showing inflation to average 5.1% this year. The war presents “substantial upside risk” to prices, she said.
Rodriguez, the French ceramics entrepreneur, looks at this threat with dread. He warns that the problems he finds are likely to ripple throughout global manufacturing.
“There’s a domino effect,” he said. “All the big industrial companies on the planet have the same problem. In the more or less long term, we will all be faced with this problem of overpriced gas.”
Information for this article was provided by Christoph Rauwald, Giovanni Salzano and Irina Anghel of Bloomberg News.