European inflation is rising due to energy and war concerns

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PARIS – Rising energy prices pose a growing problem for European economies as new figures on Friday showed that eurozone inflation rose to 7.5 percent this month, the highest level ever, while economic growth weakened to 0.2 percent .

Inflation was a key issue in Europe even before the war in Ukraine, when its economies struggled to cope with supply chain disruptions and the impact of coronavirus restrictions. Recent European sanctions against Russia and rising tensions over fossil fuel imports have further exacerbated concerns about sending energy prices up.

“Higher energy prices are becoming clearly unsustainable,” said Simone Tagliapietra, a senior fellow at Bruegel, a Brussels-based think tank. “It is a major driver of inflation in Europe.”

The pressure is unlikely to drop. On Wednesday, Russia effectively shut off the supply of natural gas to Poland and Bulgaria when the Kremlin warned that other countries could face the same fate.

Such threats combined with deteriorating economic prospects could force European leaders to adopt less risky sanctions against Russia in the future. Inflation is now significantly higher than the European Central Bank’s target of around 2%.

Why has Russia stopped gas supplies to Bulgaria and Poland?

Recent figures reinforce concerns about “stagflation”, which is a halt to economic growth accompanied by rising prices. Consumer confidence has fallen in Europe as wages have not kept pace with the rapid rise in prices.

According to Eurostat, the EU’s statistical office, the adjusted GDP in the euro area was only 0.2 percent higher in the first quarter of this year than in the previous quarter. Growth in the EU was slightly higher at 0.4 per cent, but also a decrease compared to the last quarter.

The eurozone consists of 19 countries that share the euro as their currency. It is separate from the EU, a bloc of 27 member states. Among the major EU economies, Italy was particularly affected, with the economy declining in the first quarter. Growth stalled in France, while Germany fared slightly better.

But the data only captured the initial period of the war, while rising energy prices are expected to hit Germany, the EU’s largest economy, particularly hard in the coming months.

“These are huge increases in people’s bills that will definitely have an impact on their standard of living, and it will hit poorer households much harder than richer households,” said Andrew Kenningham, Europe’s chief executive at Capital Economics. “Western Europe is going to suffer quite a bit from the higher energy prices,” he added.

In the recent French presidential election, the right wing gained significant ground with promises to ease the inflation shock and weaken sanctions against Russia, even though it failed to win the vote last weekend.

US economy shrinks during the first three months of the year

So far, the EU appears to be committed to getting rid of Russian energy, with a coal embargo already in place. An oil embargo is still under debate, and Berlin signaled this week that it might support such a move.

But some analysts expect the bloc will try to avoid a total immediate ban and instead opt for measures that would be easier and faster to implement. For example, the EU could impose tariffs or a price cap on Russian oil, which could help mitigate the negative economic consequences for Russia. “Tariffs would ultimately be paid by the Russians, not by the Europeans,” Tagliapietra said.

Europe is not the only region where economic growth has been hampered by the effects of the pandemic and concerns over the outcome of the war in Ukraine. In the United States, the economy unexpectedly shrank 1.4 percent in the first three months of 2022 after more than a year of rapid growth, according to the Bureau of Economic Analysis.

It was the first slowdown in the United States since the spring of 2020, marks a turnaround from the violent pace that followed intense fiscal and monetary stimulus in the wake of coronavirus. Last year, the U.S. economy grew by 5.7 percent, the fastest annual cut since 1984. European economies were estimated to have grown 5.2 percent last year.

Abha Bhattarai contributed to this report.

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