23rd Mar 2023

EU summit's uncertainty in the face of economic war

  • Mario Draghi called for an additional EU summit in July to work out a joint response to battle inflation and recession (Photo: European Parliament)
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Top of the agenda for the 27 EU leaders gathered in Brussels was the fallout of what has become a fully-fledged economic war with Russia.

Gas cut-offs and disrupted supply of food and resources have driven up inflation in the bloc to 8.1 percent.

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As a result, although the EU economy is still expected to grow this year, a recession is fast becoming a threat, especially for some of the most indebted member countries.

Leaders on Friday (24 June) spoke of the importance of unity in the face of economic disruption, which unevenly hits member countries.

"Inflation is a worry for all of us, and we are united and agreed to coordinate our economic policy responses closely," EU Council president Charles Michel told press on Friday.

But inflation in Estonia is clocking in at 20.1 percent, while in France, it is only five percent. And it is not yet clear what a common response would look like.

To dispel uncertainty, EU commission president Ursula von der Leyen said at the close of the two-day summit that "it all starts with our response to the gas disruptions", which is causing most of the price rise.

Demand-reduction plan in July

"We have reviewed all national emergency plans. And we are working on a common EU demand-reduction plan," she said, which will be presented in July.

EU council president Charles Michel said negotiations on the banking union are continuing, but these are unlikely to yield short-term relief.

In the meantime, Europe faces a tough choice: it needs to tackle inflation, but at the same time, it needs to invest hundreds of billions of euros a year to achieve its climate targets.

"We need to design rules that reconcile higher investment needs with sound fiscal finances," von der Leyen said, leaving out any details.

Italian prime minister Mario Draghi called on his colleagues to hold an additional EU leaders' summit in July to work out these details as soon as possible.

In a June meeting in Paris at the Organisation for Economic Cooperation and Development (OECD), Draghi suggested setting up a replica of the NextGenerationEU €800bn temporary recovery fund using joint EU borrowing.

"That has helped us recover swiftly from the pandemic," he said.

But amid all the talk of unity, some old fault lines in economic governance emerged.


"Just to put more money in the pockets of European citizens, won't solve the problem; it would only increase the inflation," Swedish prime minister Magdalena Andersson said, fearing financial support for households and businesses might spur demand further fuelling inflation.

She also sounded less than enthusiastic about the prospect of reopening tough negotiations on EU fiscal rules.

"If we had an extra meeting, it would have to be for us to make some kind of decision. Otherwise, I think it's maybe not the most productive way of using our time," Andersson said.

Draghi, betraying a different viewpoint, said inflation is not caused by excess demand.

European Central Bank president Christine Lagarde, also present at the summit on Friday, has said previously that domestic EU economic authorities have little influence over rising prices because 75 percent is "imported."

"It is difficult to predict how the war will proceed and how this will affect inflation," Latvian prime minister Krišjānis Kariņš said, summarising the challenge of dealing with multiple crises at once. "But our primary concern should be to help vulnerable citizens, especially the coming winter."


ECB rate-setting versus green climate goals

Following the European Central Bank's unanimous decision earlier this month to end negative interest rates by September, nervous private investors and speculators immediately started selling their government bonds.


An inflation surge, but (some) economists warn on raising rates

Rising prices have fuelled the debate among economists about inflation risk - with some arguing that central banks should increase interest rates, while others urge governments and central banks to adopt more precise and targeted measures.

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