Russia’s aggression in Ukraine and the consequent rise in energy and commodity prices will slow eurozone economic growth this year and next, pushing inflation to record levels, the European Commission predicted on Monday.
Shortly before the start of the Ukraine war, the commission lowered its growth forecast for the 19 countries that shared the euro this year from 4.0% in February alone to 2.7%. Next year’s growth will slow to 2.3%, down from the previous 2.7%.
The forecast is the first comprehensive estimate of the economic cost of the conflict between the eurozone and its neighbors for the larger 27-nation EU.
“Before the war, the vision of the EU economy was for prolonged and strong expansion. But Russia’s invasion of Ukraine has created new challenges, just as the Union has recovered from the economic impact of the epidemic, “the commission said in a statement.
“By exerting further upward pressure on commodity prices, disrupting new supplies and increasing uncertainty, the war is pushing pre-existing headwinds toward growth, which was previously expected to decline.”
Moscow has called its invasion a “special military operation” to free Ukraine from fascists, a claim Kyiv and its Western allies say is a baseless pretext for an unpleasant war.
The commission said that if Russia cut off gas supplies to the EU, the European economy would be hit even harder, cutting its growth forecast to 2.5 percent in 2022 and 1 percent in 2023. A recession, it said.
Inflation, which the European Central Bank wants to keep at 2.0% this year, will be 6.1%, the commission forecast, falling to 2.7% – still better than the ECB’s target – next year. Before the war, the commission expected prices to rise 3.5% in 2022 and 1.7% in 2023.
The commission said the prospect of a sudden cut in Russia’s gas supplies would push up inflation by an additional 3 percentage points in 2022 and an additional 1 percentage point in 2023.
European Union Economic Commissioner Paolo Gentiloni told a news conference that “the uncertainty surrounding the outlook has clearly increased and the risks have tended to be negative and mainly related to the war period.”
Despite rising electricity prices and government spending to support millions of refugees from Ukraine, the withdrawal of the overall COVID-19 support system will reduce the overall EU government deficit from 4.7% in 2022 to 3.6% of GDP in 2021. That should come down to 2.5% in 2023, the commission said.
In the eurozone, the overall deficit will halve to 3.7% this year compared to 2021 and further 2.5% next year, while the collective debt of the eurozone will fall from 97.4% in 2021 to 94.7% of GDP and another 92.7. 6 will come down % In 2023.
Also, despite slower growth, unemployment in the eurozone will fall further to 7.3% this year and from 7.7% in 2021 to 7.0% in 2023.