EU heavily hit by the war in Ukraine, says European Investment Bank

EU heavily hit by the war in Ukraine, says European Investment Bank

European Investment Bank (EIB) has warned that multiple crises would push into poverty already vulnerable households and firms in the EU member countries. The latter record lower levels of growth, as economies are impacted by high commodity and energy prices, says the new report titled “How bad is the Ukraine war for the European recovery?”.

European member countries were still struggling to fight challenges brought over by the pandemic when the war in Ukraine added up new obstacles, putting at high risk the sustainable development of the continent in general. Growing food prices and rising uncertainties together with mounting energy and commodity prices jeopardize markets, pushing back investment and economic growth.

Post-war forecasting shows that the real economic growth in the EU will likely drop below 3% in 2022 compared to 4% projected by the European Commission before Russia’s invasion. Countries such as Poland and Hungary are impacted the most, while Italy and Germany, being dependent on Russian oil and gas, are under pressure as well. EIB Vice President Ricardo Mourinho Félix, commenting on the results published in the report, noted:

“Maintaining good public policy coordination will be crucial to managing the economic impact of the war and will send a clear signal to markets, reducing uncertainty and tempering the risks of a new recession.”

Fig.1. Projections for real GDP growth in the European Union (in %)

Source: EIB, How bad is the Ukraine war for the European recovery?

According to the EIB estimates, around 2 to 2.5 percentage points increase in prices due to the war is expected to trigger a 1.1% reduction in private consumption in the EU. This significant drop will affect households already at risk of poverty. Romania with the highest share of the population at risk of poverty in 2020 (35.83 percentage points), experienced a further 1.8 percentage points increase due to the war in Ukraine. Bulgaria and Greece follow Romania with 33.66 and 26.87 percentage points share of the population at risk of poverty in 2020, respectively. These countries experienced a 2.9 and 2.5 percentage points increase in the share due to Russia’s invasion.

Overall, however, the highest rise in the share of the population at the risk of poverty has been recorded in Slovakia with 4.3 percentage points increase, followed by Estonia with 3.7 and the Czech Republic with 3.5 percentage points increase.

Fig.2. Share of population at risk of poverty

Source: EIB

Not only households in the EU have been heavily impacted by the war in Ukraine, but also companies report losses continually. EIB Chief Economist Debora Revoltella expressed her fear over the situation, noting:

“Inflation and higher energy prices pose a new risk to EU firms already weakened by the pandemic. Our models show that in one year, the proportion of firms at risk of default rises from 10% to 17%. In response, we need to implement clear policies to protect firms and ensure that public investment is fully used to catalyze private investment.”

According to the report, the war in Ukraine impacts the companies through the following channels:

1. Fall in exports due to restrictions,

2. Lower company profit due to the growing levels of energy prices, and

3. Limitations related to funding as banks try to avoid risks.

Overall, according to the EIB model, the share of EU companies losing money is expected to jump from an average of 8% to 15% after one year following the war. A higher increase in the share of firms reporting losses caused by higher energy prices is recorded in countries with the higher energy intensity of production such as Greece, Spain, and Croatia. High losses due to the restrictions related to the suspension of exports to Ukraine, Russia, and Belarus were recorded in Lithuania, Latvia, and Hungary. In all three countries export shares to Ukraine, Russia, and Belarus before the war were above 1.5% of GDP.

Fig.3. Increase in the share of firms reporting losses (in percentage points)

Source: EIB