THE STATE OF THE EUROPEAN UNION. Reforming Europe in a time of war

THE STATE OF THE EUROPEAN UNION 24 litical and consequently also economic tensions arising from the Russian war of aggression that has been waged against Ukraine since 24 February 2022. In view of the consequences of the war in Europe but also the supply bottlenecks caused by pandemic-related lockdowns in other parts of the world – for example, as a result of China’s zero-COVID strategy – the Commission reduced its growth forecast for 2022 to 2.7 percent for the EU and for the euro area. It points out that up to 2 percent must be interpreted as a carry-over from the particularly robust rebound in growth that occurred in the second and third quarters of 2021 (European Commission, 2022b). This shows, however, that the EU will not be able to return to its pre-crisis level of economic growth. Instead, new problems have emerged with the Rus- sian invasion of Ukraine: the sanctions imposed by the West on Russia and Russia’s suspension of oil and gas deliveries caused an explosion in energy prices in the first half of 2022. The price pressure affects industry, making goods and intermediates more expensive. It also affects the propensity to consume of private households, which have to contend with high energy costs and higher food prices. The Commission estimates that inflation will hit 6.8 percent in 2022 (euro area: 6.1 percent), although there will be significant differences within the Commu- nity. Countries that are heavily dependent on Russian energy and/or the temporary suspension of supply from Russia – Bulgaria, Czechia, Estonia, Lithuania, Poland – expect price increases of 11 percent, while the estimated inflation rate is expected to remain below 5 percent in France, Malta, Portugal and Finland. However, given the rapid increase in energy prices, these forecasts are sub- ject to considerable uncertainty: in June 2022, the Har- monised Index of Consumer Prices was already estimated to be 8.6 percent in the euro area; in the Baltic states, inflation of around 20 percent compared to the previous year’s value is expected. Growing concern about the cost of living led to a rebound in the household savings ratio in 2022, follow- ing a significant increase in consumer spending in 2021. Together with an expected drop in investment as a result of the European Central Bank’s increasingly restrictive interest rate policy as a means of fighting inflation, this holds out the prospect of economic stagnation. Because of the uncertainties surrounding the geopolitical tensions arising from the war in Ukraine, this could lead to a reces- sion. In light of the price increases, there are concerns of a spillover into wage development, potentially resulting in a self-perpetuating wage-price spiral into stagflation. Even if labour costs in the EU have recently increased, a rise in wages and salaries of 3.8 percent in the first quarter of 2022 compared to the same quarter in the previous year (euro area: 3.3 percent) shows mainly the catch-up effects of a reverse trend that prevailed during the pandemic. Safeguarding employment Despite the economic uncertainties, the labour market in the EU performed very well. The EU’s courageous deci- sion at the start of the pandemic to temporarily suspend the Stability and Growth Pact in order to allow Member States implement comprehensive support measures to stimulate macroeconomic demand and the Community financial support it provided to establish short-time work schemes within the framework of the SURE instrument (Support to mitigate Unemployment Risks in an Emer- gency) helped to ensure that the labour market did not succumb to the same negative trend as GDP. With the recovery in GDP at the end of lockdown in 2021, the labour market was also re-energised: in Q4 2021, the unemployment rate in the EU was lower than it had been before the crisis (6.5 percent compared to 6.7 percent in Q4 2019). It fell to 6.1 percent in May 2022 (euro area: 6.6 percent). This coincided with an increase in the employment rate to 74.5 percent by Q1 2022 (euro area: 74.1 percent) – here also the EU could move on from the crisis-related collapse.The youth unemployment rate also fell sharply: while it still stood at 17.6 percent in the EU in May 2021, within a year it had dropped by four per- centage points to 13.3 percent (euro area: 13.1 percent).