Towards the end of last year, English publisher Collins designated ‘perma-crisis’ as the word of the year, symbolizing the prolonged period of instability and uncertainty that the world is currently going through. Just when normality as we knew it was struggling to re-emerge after the pandemic, the world was once again plunged into crisis with the Russian invasion of Ukraine.

Fast-forward a few months and Europe finds itself with a very tight balancing act on its hands as it strives to navigate a complex economic landscape. The objectives of taming inflation, fostering economic growth and safeguarding financial stability are seemingly at odds with each other.

Despite initial predictions of recession due to the war, sanctions and efforts to reduce dependence on Russian energy, the European economy has displayed remarkable resilience. Rapid supply diversification, effective political coordination and a substantial decline in gas consumption have played pivotal roles in weathering the energy crisis. This has resulted in an upward revision of the GDP forecast for 2023.

Lower energy prices have permeated the economy, reducing production costs for businesses and benefiting consumers through reduced energy bills. However, private consumption remains constrained as wage growth lags behind inflation.

Eurostat’s latest data shows that the EU and euro area experienced modest GDP expansion of 0.3 per cent and 0.1 per cent, respectively, in the first quarter of 2023. Leading indicators point to a continuation of growth into the second quarter. A strong job market has been a crucial pillar supporting this growth, with the EU unemployment rate reaching a record low of 6.0 per cent in March 2023 while participation and employment rates have reached record highs. However, risks persist, as highlighted by Germany, Europe’s largest economy, slipping into recession in the early spring.

High levels of inflation continue to erode domestic consumption. Core inflation, particularly food prices, has defied expectations and remained elevated, even reaching double-digit levels in some European economies.

The European Commission’s latest economic assessment highlights an escalation in downside risks, primarily driven by persistent core inflation. This poses a significant threat to household purchasing power and has increased calls for a more robust monetary policy response with wider macro-financial implications. Other risks include the continuation of war on Europe’s border but also recent stresses on the financial services industry after the collapse of two banks in the US and the Credit Suisse saga in Switzerland.

The EU’s economic outlook for 2023 anticipates a growth rate of 1.0 per cent, while inflation is projected to persist. Indeed, the European Union has been urged by the International Monetary Fund (IMF) to implement significant structural reforms, particularly aimed at increasing labour participation rates.

Key tools such as the Recovery and Resilience Plans and the Capital Markets Union are seen as crucial in unlocking investments necessary to enhance crisis-hit productive capacity, achieve climate goals, and bolster energy security.

Simultaneously, the resurgence of energy prices and potential fragmentation risks pose additional challenges to economic growth and inflationary pressures. This presents policymakers with an added layer of complexity as they strive to effectively address these issues. The IMF has recommended that the European Central Bank continues to raise interest rates for at least another year to combat persistent inflation, although this may impact the region’s economy and contribute to concerns about a potential recession.

Europe faces a complex and delicate task of striking a balance between inflation, growth and stability.

Overcoming challenges posed by the energy crisis and the aftermath of the pandemic requires strategic policy responses and structural reforms. Unity and coordination are very much needed as Europe seeks to steer its economy towards sustainable growth and resilience while mitigating the risks that lie ahead.