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Speech by Commissioner Gentiloni at the Peterson Institute for International Economics: Transatlantic economic policy in times of war

Speech given yesterday by Commissioner Gentiloni at the Peterson Institute for International Economics: Transatlantic economic policy in times of war

Thank you Adam for this introduction. It is a pleasure to be in D.C. and to be at the Peterson Institute for the first time in person, even if unfortunately the audience is still virtual. It is right to remain prudent – and to remind ourselves that the pandemic is not yet over. One step at a time!

It is now almost two months since Russia's unprovoked and unjustified invasion of Ukraine. Two months of indiscriminate killings, bombings of civilian targets and absolutely shocking violence. Two months of a war happening just across from EU and NATO borders, the effects of which are being felt the world over. Indeed, this week's IMF Spring Meetings are overshadowed by the impact of the war on the world economy.

But the consequences of Putin's senseless war extend beyond the economy. It is also reshaping the energy landscape and triggering a shift in defence policies. I will focus this morning on the war's economic impact, while also touching on its broader implications in these two areas – energy and defence – from a European and transatlantic perspective. 

[Economic implications]

This new crisis hit us just as our economies were shaking off the effects of the COVID-19 shock and the global recession of 2020. 

We started this year with EU GDP back at pre-pandemic levels. Unemployment had reached record lows. Accumulated savings were high. And business and consumer surveys were painting a picture of growing confidence.

This swift turnaround since 2020 stands in stark contrast with the global financial crisis of 2008. Then, it took about seven years for EU economic output to reach pre-crisis levels.

This success is a testament to the strength and the coordination of our fiscal and monetary policy response, both within Europe but also at G7 and G20 level.

The US economy had a similarly fast and strong recovery, with some differences compared to the EU due to different safety nets and support mechanisms.  

Of course, as we entered 2022 we were already facing a number of challenges: notably rising energy prices and supply chain disruptions, both contributing to mounting inflation.

And indeed GDP may have returned to pre-crisis levels, but it had not reached yet its pre-crisis trend. Which is really the key indicator to consider our recovery complete.

Nevertheless, the fundamentals of our economy were solid and our assumption was that these challenges would subside over the course of the year. The European economy was on course to reach its trend level later in 2022. Our Winter Economic Forecast, which I presented on 10 February, projected 4% growth in the EU for this year.

The war in Ukraine has shattered these assumptions and changed the picture dramatically. Surging commodity prices have driven inflation to new records. Broken trade links are exacerbating supply chain strains. And confidence has been damaged. Let me touch on each of these.

First, significantly higher commodity prices, notably oil and gas, but also wheat prices, among others, are putting further pressure on already high consumer inflation.

In the euro area, inflation reached 7.4% in March, the highest level since the introduction of the single currency. However, this number masks significant divergence between the 19 euro area Member States. Four are experiencing double-digit inflation while in a couple it remains more subdued at around 5%.

Inflation has similarly shot up in the US, even though there are some differences when it comes to the main drivers.  The largest driver of inflation in the euro area are energy prices, which reached almost 45% last month. Let me recall that in January 2021, energy inflation was still in negative territory.

In the US, inflation is mostly driven by strong demand and the consumption boom triggered by the policy response to the pandemic.

However, it is also clear that inflation in Europe is becoming more broad-based. The effects of the war are adding to pre-existing drivers of price rises, related to the effects of the post-pandemic recovery. At the same time, it is important to underline that inflation expectations remain anchored and that, for the moment, we see only limited second-round effects.

Second, the war and its consequences – including the successive rounds of sanctions that the EU and the US have imposed on Russia – are exacerbating pressures on already strained global supply chains. This is affecting output in a number of sectors, as well as exerting further upward pressure on prices.

Explicit embargoes, implicit bans and voluntary withdrawal from trade are inevitably having an impact on commerce. This may prove particularly important for some Member States with stronger links to Russia. In the Baltic states, for instance, exports to Russia account for some 5% to 8.5% of total exports, compared to 1.8% for the EU as a whole.

So while we continue to stand by the sanctions decisions which we have coordinated with our allies, we also have to be honest with our citizens: this strategy is not without a price.

These developments increase both the need and the likelihood that supply chains will undergo major reorganisations. Strengthening trade links with other partners will take time and may be costly in the short term. They will however reduce our strategic dependence from Russia.

Third, consumer confidence has dropped markedly since the invasion, while business confidence has so far been less affected. We will need to continue to track this soft data carefully in the coming weeks and months. The first data reflecting the impact of the war will be the preliminary GDP flash for the first quarter, which Eurostat will publish at the end of this month.

My conclusion is crystal clear: we see a significant economic impact from the war. The global impact is particularly deep for the EU. The duration of the war will determine its cost, both humanitarian and economic.

EU Member States have started to adopt a variety of measures to tackle this crisis. These include economic and material support to Ukraine, assistance to refugees, as well as continued support to the economy to deal with high energy prices and disruptions in production.

These initiatives will inevitably weigh on budget deficits. According to our preliminary assessment, the initiatives taken by governments so far will increase budget deficits by at least 0.6% of GDP this year.

Overall, it is clear that the 4% growth we had projected for this year looks out of reach. It is too soon to reveal by how much we will need to trim this forecast. I will be able to provide a first indication on May 16, when I will present our Spring Economic Forecast.

To ensure our economies successfully navigate these troubled waters, we need to maintain agile and responsive fiscal policies, much like we did during the COVID crisis. The Commission will provide updated guidance for fiscal policy in 2023 as part of the European Semester spring package that we will present on 23 May.

We must also continue to implement effectively the national recovery and resilience plans Member States put in place in the wake of the pandemic. This is key to supporting confidence and delivering the investments and reforms our economies need, now more than ever.

Beyond the economic impact of the war, there are – as I mentioned – deeper implications for our policies in other areas and for the transatlantic alliance more broadly.

This crisis has been in many ways a wake-up call for Europe: it is high time to reduce our dependencies in strategic sectors and to strengthen our autonomy.

The pandemic had already prompted this wider rethink, especially with regard to reassessing our supply chains in key areas. But the war has drastically accelerated this process, in particular in the fields of energy and defence.   

[Energy]

As Secretary of State Anthony Blinken aptly put it recently, Russia is now using energy as a weapon. This clearly changes everything. It has sparked a seismic shift in the energy landscape.

The US was quick to impose an embargo on Russian energy imports. As you know, in Europe we have banned coal imports from Russia and are actively discussing the possibility of further sanctions involving oil and gas.

This approach reflects the different exposure to Russian energy on the two sides of the Atlantic. The US is a net exporter of energy with low exposure to Russia. In Europe, ninety percent of the gas we consume is imported and Russia provides almost half of those imports, in varying levels across Member States. Russia also accounts for 27% of oil and 46% of coal imports.

Nevertheless, the EU has already taken very bold decisions. We have sent a clear message to the Kremlin: we will not be blackmailed.

In March, the Commission announced the REPowerEU plan, with the goal of slashing EU demand for Russian gas by two thirds before the end of the year, and to make Europe independent from Russian fossil fuels by 2027.

The challenge will be to square the seemingly impossible trilemma of keeping energy prices affordable, ensuring security of supply and pursuing our green goals.

Soaring energy prices are harming the competitiveness of our firms and impacting low income households most severely. We have encouraged Member States to make use of a toolbox of measures to tackle high energy prices, from cutting VAT rates to providing direct support to the most vulnerable groups. This has been followed by a new temporary State aid framework. And we are discussing more far-reaching options, such as setting regulated prices. 

Cutting our dependence on Russian energy while securing sufficient gas for next winter means we must increase imports from other suppliers.

Discussions with partners have intensified in recent weeks and have led to the recent deal announced by President Biden and President von der Leyen for the US to provide additional supplies of LNG to the EU. This deal marks an important step in our efforts to diversify gas supplies and is a powerful symbol of the strength of our alliance in times of crisis.

Boosting imports from other suppliers is one way to secure alternatives to Russian gas in the short-term. But make no mistake: the best way to ensure we can meet our energy needs is to diversify our energy sources and reduce our dependency on fossil fuels altogether.

The case for a rapid clean energy transition has never been stronger and clearer. The EU is already a global leader in this respect. But in the current situation, we need to do more, and we need to do it faster. It would be a mistake to put on hold the green transition while we face this crisis and we must avoid doing that.

At the recent summit in Versailles, EU leaders tasked the Commission to present concrete measures to make REPowerEU a reality. One month from now, on May 23, we will present our plan. As you can imagine, work is ongoing and it is too soon to share details. What I can say is that REPowerEU must be backed by the necessary national and European resources. The Recovery and Resilience Facility will have an important role to play.  

[Defence]

Finally, the war in Ukraine also marks a turning point for Europe's defence policy and for the transatlantic relationship.

Positions that were held for decades have shifted in a matter of days.

For the first time in its history, the EU agreed to deliver arms and other equipment to a country under attack. With the latest announcement from earlier this month we have now pledged 1.5 billion euros in military aid to Ukraine. Unprecedented.

In Versailles, EU leaders committed to bolster our defence capabilities, pledging to: substantially increase defence expenditure; develop joint projects and joint procurement of defence capabilities within the EU; increase investments in technologies and innovation for security and defence; and further develop our defence industry.

Russia's invasion of a country bordering NATO has also strengthened the transatlantic alliance – and its attractiveness to countries like Finland and Sweden where we have witnessed a sea change in public opinion on this matter in recent weeks. And we will see the consequence in the coming weeks.

The Versailles Declaration stresses that the EU's efforts in this field are complementary to NATO, which remains the foundation of collective defence for its members.

Indeed, where would we be now if the Baltic states, Poland or Romania were not in NATO? I believe that NATO's eastward expansion has actually put us in a better place to deal with Putin's history of aggressing Russia's neighbours.

Boosting our defence capabilities will require significant investments in our industrial and technological base.

The new defence investment needs come on top of those to deliver on the green and digital transition. We are currently working on an updated analysis of our investment needs in these strategic sectors, which will be ready with our REPowerEU plan later in May.

But we are talking about mobilising hundreds of billions of additional investments each year. While most of these investments will need to come from the private sector, financing them will require a more supportive framework of fiscal rules and potentially new tools at the European level.

[Conclusion]

Two years since the start of the pandemic, Russia's invasion of Ukraine has plunged us into another crisis.

While its economic impact will only gradually become fully clear, its broader significance was evident from that fateful 24 February.

When Russian tanks rolled across the border, they did not just trample on Ukraine's sovereignty but on the very notion of the international rules-based order. Ukraine is being shelled for its Western aspirations – for trying to build a liberal democracy based on freedom and the rule of law and for seeking closer ties to the West and the European Union. This is simply unacceptable.

This is why Europe and its allies have taken a strong and united stance: while staying clear from a dangerous direct participation in the war, we are providing full support to Ukraine.

In this confrontation, our economic resilience is crucial not just to protect our citizens, but also our model of Western liberal democracy. That is what is at stake now. This war might drag on for longer than we think. In the weeks and months ahead, we need to maintain the same unity that we have shown over the past two months, both across the ocean and within the EU.

This crisis will also spell the end of globalisation as we have known it and reshape global alliances. The notion of Wandel durch Handel, of bringing about change through trade, has shown its limitations. We need to rethink our relations with autocratic regimes and strengthen our ties with like-minded partners.  We do not need a revival of protectionism. What we need is a new and more secure globalisation. The balance, of course, will not be an easy one to find.

This year marks the 75th anniversary of the Marshall Plan, a project that was decisive in so many ways: it cemented transatlantic solidarity; it kickstarted Europe's postwar recovery; and it sowed the seeds for economic integration on our continent.

And when peace returns to Ukraine, we will need a new Marshall Plan to rebuild the country – better, stronger, greener, more secure – and to help it along its path towards the European Union. An immense challenge, which together we must turn into an opportunity: for Ukraine, for Europe, and for our transatlantic community of democracies.

Thank you.

Click here for the full press release

 

Original article link: https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_2556

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