Multiple crises increase recession risk in Europe: IW-Xinhua

Multiple crises increase recession risk in Europe: IW

Source: Xinhua

Editor: huaxia

2022-08-12 02:18:30

BERLIN, Aug. 11 (Xinhua) -- A study published by the German Economic Institute (IW) on Thursday showed that multiple crises such as the COVID-19 pandemic and the Russia-Ukraine conflict have increased the risk of recession in Europe.

While national approaches to major crises are "understandable," in the current Russia-Ukraine conflict, this risks a "progressive divergence in economic development," the study said, adding that reinforcing the "imbalance between economies" caused by the crises would bring the European Union (EU) "on the brink of recession."

Last year, the EU adopted an 800-billion-euro (826 billion U.S. dollars) recovery package to overcome the effects of the pandemic. Spain and Italy, the two hardest-hit countries, received the largest share of 77 billion and 70 billion euros respectively in non-repayable aid.

Although the program appeared to provide positive incentives for private investment in the bloc, a rapid or a much hoped for V-shaped recovery did not materialize, the study said.

EU countries were hit to different degrees and in some member states such as Germany, Spain and Italy, private consumer spending or industrial production were still below pre-crisis levels. In addition, the already high inflation rates were "further driven by exogenous energy price shocks," IW noted.

Driven by soaring energy prices, inflation in the EU rose to 9.6 percent in June. The highest rates were recorded in Estonia and Lithuania, at more than 20 percent. In Germany, the upward trend slowed slightly in July to 7.5 percent, according to official data.

To curb the high inflation rates, the European Central Bank (ECB) has raised its key interest rate. After a first step of a 0.5 percentage point in July, more are to follow. "This was the first rate increase in 11 years. But it is in fact only the latest step in our journey to unwind the special measures we had to take to fight a series of crises," said ECB President Christine Lagarde in July.

However, an immediate effect of the interest rate hike was unlikely, according to the IW. Instead, the ECB's intervention could even increase the risk of recession. "Stagflation is a veritable risk in Europe," the institute warned.

In the wake of the energy crisis, large economies with a high share of industry such as Germany could be left behind, while it would become "increasingly difficult for companies to keep the economy productive and competitive," IW warned. "In the long term, in the worst case, this will lead to the migration of entire industries abroad." (1 euro = 1.03 U.S. dollars)