4th Jun 2023

EU escapes recession, but war remains biggest risk to economy

  • EU economy commissioner Paolo Gentiloni warned that a 'better-than-expected outlook ... doesn't mean we have a positive overall outlook' (Photo: European Commission)
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The EU's economy is expected to "narrowly" avoid recession this year as the bloc decreases its dependence on Russian energy — but Moscow's invasion of Ukraine remains the biggest risk to the European economy.

The EU Commission, in its winter forecast lifted the growth outlook for this year to 0.8 percent in the EU and 0.9 percent in the 20-member euro area.

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Inflation in the eurozone, which hit a record 10.6 percent last October on the back of surging energy and food prices caused by the Russian invasion of Ukraine, is set to decrease to 5.6 percent this year and 2.5 percent in 2024.

This would be a greater deceleration that previously expected, last autumn, at 6.1 percent for this year and 2.6 percent for 2024.

Economy commissioner Paolo Gentiloni, however, warned against interpreting it as the EU rebounding completely.

"We have [a] better-than-expected outlook, less negative than expected situation, this doesn't mean we have a positive overall outlook," he said, adding that predicted growth is under one percent and inflation is still high.

The Italian ex-premier said that, at the same time, the forecast contradicts earlier fears of "stagflation, deep inflation, blackouts".

Gentiloni said it was "impressive" that the EU has reduced its energy consumption by 25 percent in October and November last year, with the help of mild weather, and thus reduced energy dependence on Russia.

Nevertheless, the war remains the biggest risk to the EU's economy.

"The main risk to this forecast is based on the geopolitical tensions, and the evolution of the war," Gentiloni said, adding that "this gives to the economy, investors, companies a high degree of uncertainty".

The forecast hinges on the assumption that Russia's aggression of Ukraine "will not escalate, but will continue", the commission said.

At the same time, the commission warned that core inflation (inflation of goods and services, excluding energy and food prices as their prices is much more volatile) was still on the rise in January, and has not yet peaked.

The commission warned that monetary tightening is set to continue, which is expected to weigh on businesses and investments.

Gentiloni, however, did not want to criticise the European Central Bank's belt-tightening, saying it contributes to reducing inflation.

Labour markets have continued to perform strongly, with the unemployment rate in the EU remaining at its all-time low of 6.1 percent in December.

Sweden is the only EU member that registered a recession for this year (–0.8 percent). Germany and Italy, two countries that had been highly-dependent on Russian energy, are set to grow by 0.2 percent and 0.8 percent this year, respectively.

France will grow by 0.6 percent while Spain will increase by 1.4 percent in 2023.

"It [the forecast] shows any return towards austerity would be misguided in principle and in practice," confederal secretary for European Trade Union Federations (ETUC) Liina Carr warned, commenting on the commission's predictions.

"Massive public investment is needed to deliver a socially-just transition to a green economy," Carr added.


Squeezing wages is not the answer to inflation

The inflationary "threat" is a favourite bogeyman of conservative and neoliberal economists. For them it's a question of defending savers and wealth and preparing the ground for austerity policies. This vision fails to identify the actual reasons behind price rises.

Report: Renewables best way to deal with inflation

Some EU politicians want to expand gas supply to deal with high energy prices, but global think tanks Ember and E3G claim a better way to deal with high energy prices is by fast-tracking renewables.


'We need different tools to deal with inflation'

Instead of suppressing the entire economy to tackle inflation, the economist Isabella Weber says a less damaging way to address it is by directly controlling the price of essential resources — like gas and energy.

EU: national energy price-spike measures should end this year

"If energy prices increase again and support cannot be fully discontinued, targeted policies to support vulnerable households and companies — rather than wide and less effective support policies — will remain crucial," the commission said in its assessment.

EU: national energy price-spike measures should end this year

"If energy prices increase again and support cannot be fully discontinued, targeted policies to support vulnerable households and companies — rather than wide and less effective support policies — will remain crucial," the commission said in its assessment.


EU export credits insure decades of fossil-fuel in Mozambique

European governments are phasing out fossil fuels at home, but continuing their financial support for fossil mega-projects abroad. This is despite the EU agreeing last year to decarbonise export credits — insurance on risky non-EU projects provided with public money.

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