Not often in the free West has there been such an eager anticipation of a speech by Russian President Putin. But May 9, 2022, the celebration of the Soviet victory over Nazi Germany, was therefore dominated by Russia’s ‘war’ with neighboring Ukraine. What direction is the war taking and what does it mean for the global economy? Professor of banking and finance Harald Benink warns against ‘economic escalation’.
The effects of the war between Russia and Ukraine on energy and food prices are being felt around the world. Gas and oil prices were already rising, but have exploded due to the conflict and Western sanctions. Food prices rose as a result, also because the whole harvest threatens to fail or can not be exported by “Europe’s grain magazine”.
In his speech on May 9, Putin is silent on Russia’s strategy for the near future. This has given some analysts hope that a long-term ceasefire is imminent. †And it would also have direct consequences for inflation in the Netherlands and the rest of the eurozone,† analyzes Benink, who in the same breath warns against further economic escalation: “Again, it is good that sanctions have been introduced and that the Ukrainian military is being supported. But it can also be counterproductive to raise sanctions further. “
For there is still the threat of military escalation. In terms of economic escalation, a further tightening of sanctions and a total boycott of Russian fossil fuels could also lead to major problems in Europe. The question is whether in the short term one can change the behavior of the Russians with a total boycott of Russian oil and gas. In any case, European industry will suffer greatly from rising scarcity and a further rise in oil and gas prices.
Then there is the danger of a large-scale economic downturn that could throw Europe into a prolonged recession. “A doomsday scenario is that inflation will remain high as a result of the war and that the economy will shrink at the same time,” warns Benink. †We saw this in the 1970s, a phenomenon we call stagflation, where high prices and economic stagnation at the same time permanently affect the purchasing power of large groups of people. And it’s a situation you can not easily get out of. ”
According to Benink, the West should strive for a situation where sanctions are maintained at the current high level, but should not escalate further. “It would be best economically if the situation in Ukraine at least stabilized and there is a long-term ceasefire. Then you get a so-called ‘frozen conflict’. ‘Keep a cool head and keep maximum pressure on Russia without resorting to maximum escalation,’ suggested the new Chancellor Olaf Scholz in an interview with the weekly Der Spiegel, and that is also what analysts like Rob de Wijk from The Hague Center for Strategic Studies and former Minister of Defense Joris Voorhoeve.
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Because if the conflict in Ukraine continues, inflation could rise even more in the near future, especially if the military struggle gets further out of control. And these constant price increases will certainly lead to political and social tensions in Europe itself in the long run. With the current high energy and food prices, more and more households are simply unable to pay for their groceries and their gas bills.
The most favorable scenario at the moment is that the conflict is stabilizing and that energy prices are falling to acceptable levels. “But even then, you will still have a problem, because the new price level will probably still be higher than before the crisis, while wages have lagged behind price increases.”
It will therefore be difficult to restore the purchasing power of Dutch households to the level in early 2021. And not of course, Benink thinks: †The government does not have much leeway. Tax cuts are not going to happen soon, because of course she has already made a huge amount due to the corona crisis, and there are also significant setbacks at the moment. Another means could be to raise wages. But then the burden of this crisis will fall on business.
And the question is whether the unions and the employers will find out. ‘† warns Benink. †When prices as a result of wage increases also rise again, employees have to make wage demands again and we get an escalation as in the 1970s. This eventually led to an economic crisis that lasted for years†