Wars are inherently unpredictable. As the human toll of Vladimir Putin’s invasion of Ukraine becomes more horrifying by the day, the military, political, social and economic impacts are still shrouded in the thick fog of war. It would be naïve to think that things will be back to normal anytime soon.
The IMF is the best qualified to advise global political leaders on the likely short- and long-term economic effects of the war that Russia has embarked upon. The IMF does not mince its words when it says: “While the situation remains highly fluid and the outlook subject to extraordinary uncertainty, the economic consequences are already very serious.”
Policymakers rely on economic models based on different scenarios to understand how best to manage the enormous uncertainties that countries face. The best-case scenario would probably assume a swift end to fighting, preventing a further upward spiral on commodity markets. This optimistic scenario sees no disruption to oil and gas supplies, especially in Europe, with prices stabilising at their present levels.
While financial conditions would still tighten under this scenario, the EU could continue to push its economic reforms to revitalise its economies after the pandemic. The sanctions against Russia would seriously impact countries with strong trading links to that country and to Ukraine. But energy prices would have an immediate impact on countries far from Europe’s eastern frontiers.
Another less optimistic but arguably more realistic scenario would be one where energy supplies are disrupted. So far, no sanctions have been declared on Russian crude. But major gas pipelines run through Ukraine and could be damaged by the fighting.
Europe, which gets 40 per cent of its gas from Russia, would suffer a severe economic knock if this happens.
In this scenario, the European Central Bank would have to rethink its monetary tightening plans to avoid a quick return to a deep recession but high inflation would persist.
Assuming that the war remains contained to within Ukraine’s borders, the worst-case economic scenario could be one where Russia retaliates against the sanctions by turning off the flow of gas to Europe.
Until recently, hardly any economist would have argued that this was a plausible economic development. But if it were to come about, it would maximise the risk of hyperinflation and deep recession in Europe, adding to the already identified post-COVID economic challenges.
There are, of course, other possible developments. Commodity price hikes that include staples like wheat and energy will create social crises in many countries. The IMF rightly argues: “Fiscal policy will need to support the most vulnerable households, to help offset rising living costs.”
Other hard-to-quantify risks such as cyberattacks by Russia against physical and economic infrastructure are a possibility that must not be ignored.
Locally, we are in the middle of an electoral campaign. With March 26 on their minds, politicians may be in denial about the formidable challenges that the country is likely to face in the coming years. Malta’s open economy makes it vulnerable to downside risks originating from continental Europe and beyond.
Whoever is elected at the end of this month will have to face the new realities that Europe will soon have to deal with as a result of the Ukraine war.
European political leaders are adopting a new mindset on how the EU needs to reform itself to protect its people and deliver prosperity. Our political leaders must quickly shift from partisan political rhetoric to hard talk on how to tackle the economic and social challenges ahead.