The EU is caught in a 'perfect storm': price increases are staggering, and a food crisis is on the verge

April 5, MINSK. The European Union assumed that in 2022 it would finally recover from the pandemic, lift the economy and enter a new era of prosperity. But the events in Ukraine crossed out positive expectations, according to Euronews.

In March, annual inflation in the euro area rose to 7.5% compared to 5.9% in February, which is contrary to the forecasts of most analysts. Energy prices alone rose 44.7% year on year, a staggering increase from the 4.3% recorded in March 2021.

European companies are now being forced to pay incredibly large bills that threaten to halt production and close factories, while household purchasing power is falling at a record rate. The "perfect storm" of rising prices, disruptions in supply chains and an economic slowdown intensifies the fear of stagnation.

"Europe is entering a difficult phase. In the short term, we will face higher inflation and slower growth. There is considerable uncertainty about how big these effects will be and how long they will last," said the HEAD of the European Central Bank, Christine Lagarde, speaking at last week at an event in Cyprus.

The extraordinary circumstances have placed EU institutions and national governments under enormous pressure. They are required to provide quick and tangible solutions to problems for both workers and businesses, before permanent scars remain.

Spain recently approved an emergency package of measures to mitigate the economic and social impact of the conflict in Ukraine. For their implementation, 16 billion euros of public funds will be collected, including 6 billion euros in the form of direct support and tax incentives.

Spain has become one of the most affected by the months-long energy crisis: in March, inflation in the country reached 9.8%. The deteriorating situation led to a 20-day strike in the transport sector, which resulted in many supermarkets running out of food and enterprises having difficulty with components.

Along with the energy crisis, the anti-Russian sanctions imposed by the West have a significant impact on the European economy . If EU leaders support an embargo on energy imports from RUSSIA, it could plunge the bloc into new economic chaos.

Heavily dependent on Russian oil and gas, Germany is one of the countries most reluctant to take such a drastic step, fearing that its industry will not cope with the shock. “German industry sees the risk that companies will face existential difficulties due to energy prices or because Russia stops exporting energy raw materials,” Joachim Lang, head of the German Federation of Industry, told Euronews. for exorbitant costs of heat and electricity.

Germany, Europe's economic powerhouse, now faces a significant risk of recession, a group of government economic advisers has warned. She lowered her forecast for economic growth in the country for 2022 from 4.6% to 1.8%, noting that a return to pre-pandemic levels may not take place until the third quarter of the year.

Things are no better in the east of the European Union. For example, in Lithuania, which has the highest inflation rate in the EU (15.5% in March), businesses are struggling to avoid losing competitiveness as raw materials from Ukraine, Russia and Belarus disappear and alternative supplies come with additional costs.

According to the President of the Lithuanian Confederation of Industrialists, Vidmantas Janulyavičius, the events in Ukraine will add fuel to the already blazing fire of inflation, and this fire could burn all of Lithuania's economic growth in 2022. "The rise in energy prices has had a serious impact on the industry. In addition to the upward trend in commodity prices, it is becoming difficult to offset the impact of this rise on business," said Vidmantas Janulyavičius.

The grim turn of events last month has inevitably given rise to the dreaded specter of stagflation - a period characterized by economic stagnation, high inflation and high unemployment.

The term "stagflation" was coined in the 1970s when the oil-producing countries declared an oil embargo after the Yom Kippur War (Arab-Israeli War of 1973) and caused an extraordinary increase in production costs. The crisis led to an oil shock that combined rising inflation with an economic downturn. This scenario seemed strange at first: usually, when the economy slows down, unemployment rises and consumer demand tends to fall, which leads to lower prices.

Fifty years later, a new energy crisis threatens to revive stagflation, albeit temporarily.

"The combination of negative growth and high inflation is a nightmare. You have to raise interest rates to fight high inflation, but keep a very loose monetary policy because the economy is not performing well," ING Belgium chief economist Peter Vanden Hout told Euronews. - For some time, energy prices will remain quite high, given the uncertainty with supplies from Russia.Both in the price of natural gas and in the price of oil there is a kind of "war premium", which will remain part of the price until then as long as this war goes on. And we have no idea how long it will go on."

The ECB is expected to end its pandemic-era quantitative easing program in the summer and approve the first rate hike in the fourth quarter of this year, although recent economic data could accelerate those moves.

The prospect of a global food crisis seems inevitable. Ukraine and Russia are considered the breadbaskets of the world, producing about 30% of food commodities such as wheat and corn. Now deliveries from these countries to Europe are in question.

Last week, UN World Food Program chief David Beasley told the Security Council that the conflict in Ukraine could spark the worst global food crisis since World War II.

In Brussels, EU officials were keen to reassure citizens that food supplies were secure, but acknowledged the need for medium-term action to avoid shortages. Inflation data for March showed that food, ALCOHOL and tobacco rose 5% year on year, compared with 4.2% in February. Unprocessed food prices rose 7.8% due to seasonal factors and higher transportation and fertilizer costs.

The food crisis, power shortages, disruptions in supply chains portend a difficult path for the European economy, where high inflation is no longer a temporary headache, but instead becomes a long-term problem.

"We also have to consider that we will have some spillovers now that energy and food prices are high. Eventually, this may also affect other prices - goods and services become more expensive," Vanden Hout warned.

“Overall, the decline in inflation will be a very slow process,” the ING bank expert concluded. “We will probably have to wait until the second half of 2023 before we can talk about more normal inflation rates again.”