As cost of living soars, why is war in Ukraine hitting Europe's economy so hard?

Naomi Lloyd & Guillaume Desjardins
euronews.com
Fri, 10 Jun 2022 19:23 UTC

© Euronews

RFA Co-founder Jörn Spurmann says the company is adapting parts produced for other industries to use in their rockets.

This week's Real Economy takes a look at how Russia's war in Ukraine is impacting Europe's economy and asks what next?

The EU27 and eurozone economies had been on a path of strong recovery and growth coming out of the pandemic, but the EU has recently cut its forecast for growth and hiked its inflation forecast.

Economic impact

A new surge in energy prices, linked to Europe's dependence on Russian energy is driving inflation to record highs.

Ukraine and Russia produce almost a third of the world's wheat and barley and are major exporters of metals. Disruptions to these supply chains as well as rising costs for many raw materials have pushed up the cost of food and other basic goods and services.

This puts a strain on businesses and less money in consumers' pockets. The EU has therefore cut its economic growth forecast: real GDP growth in both the EU and the euro area is now expected to reach 2.7 percent in 2022 and 2.3 percent in 2023, down from 4.0 percent and 2.8 percent (2.7 percent in the euro area), respectively, from the winter 2022 interim forecast.

Inflation - forecast at 3.9 percent just a few months ago - is now expected to average at 6.8 percent.

The cost to Germany

The war is hurting some EU economies more than others. Germany's growth forecast is one of the lowest in Europe at 1.6 percent.

Germany's Mittelstand, or mid-sized companies, are its economic backbone. But this eco-system of local firms is also heavily dependent on neighbouring countries, including Ukraine.

Five kilometres -that's the average length of cables inside your car. And if your car is made in Europe - about seven percent of that comes from Ukraine. - Guillaume Desjardins Euronews

In 2021, the European Union imported 760 million euros-worth of Ukrainian cable. Most of that went to the car industry, but the aerospace sector is also reliant on it.

While Rocket Factor Augsburg (RFA) doesn't get its supplies directly from Ukraine, when Russia invaded its neighbour in February, the company's whole supply chain was turned upside down.

RFA's co-founder Jörn Spurmann describes how the disruption is taking its toll.

"Our suppliers, they have difficulties to get certain things. We see logistics prices increasing for the shortage of containers, hopefully a temporary problem. We see energy prices increasing obviously as well. Hopefully also a temporary effect. But yeah, there are certain things that do affect business,,,but more our supply chain than us."

Spurmann and RFA are due to launch the company's first rocket into space in 2023. If they are to keep to that schedule they will need to get creative. The company is now adapting parts and components produced for other industries, to use in their rockets, as these are easier to get hold of.

"There are suppliers who are coming back with higher pricing or longer lead times...And then we need to find alternatives. There are always alternatives. We don't have any single sources, but this requires more time and more effort definitely on the supply chain management on our side," explains Spurmann.

The aerospace industry is not the only sector affected by this supply chain disruption. After two years of pandemic, the long-awaited economic recovery is now in the balance, especially with people in Europe feeling the pinch due to the rising cost of living.

The European Commission has forecast an inflation rate of 6.5 percent for Germany this year - a record high since the country's reunification in 1990.

Comment: In a Q&A ahead of the upcoming St. Petersburg International Economic Forum session, Putin said this: "If someone tries to contain us in some regard, they ultimately contain themselves."

"For example, they limit the exportation of our fertilizers - and their prices go up, far more than here. They try to limit our energy exports, and their prices go sky-high. They even try using my name to label their inflation, but the reality is we have absolutely nothing to do with it!" he said, to laughter from the audience.

The latter appeared to be a reference to US President Joe Biden's insistence that the record price of gas at American pumps was a "Putin price hike," though polls show most Americans are not convinced.

"This is solely the result of the huge mistakes they themselves made," the Russian leader added. "And now they're trying to, forgive me ladies, cover up a certain spot by blaming everything on Russia."
...
In Thursday's Q&A session, Putin shrugged off the departure of many Western companies from Russia, saying the choice to miss out on the country's great potential was their loss. He attributed the exodus to "the internal state of these countries, which cannot make sovereign decisions."

"There is no in-between status. Either a country is sovereign, or it's a colony, no matter what you choose to call it. But if a country, or a group of countries is unable to make sovereign decisions, it is already, to a certain extent, a colony, which has no historical prospects of surviving in the current geopolitical struggle."

US Treasury Secretary Janet Yellen admitted that anti-Russian sanctions are having a "huge" impact on rising prices:

Yellen was asked during the New York Times' DealBook DC Policy Forum on Thursday if already soaring US gas prices would continue to increase.

"It's unlikely that gas prices are going to fall anytime soon," Yellen replied.

She later added that the issue is tied to global oil prices, which have also been rising. "Europe is trying very hard to free themselves from dependence on Russian oil, and our sanctions on Russia... are making a huge difference to food and energy prices," Yellen said.

"I think our sanctions have been remarkably effective. But we continue to tighten them, and oil prices could go further [up]."

She said that the growth of the US economy will slow, "but there's nothing to suggest that a recession is in the works."

Yellen's comments came two days after she told the Senate that the US has been experiencing "unacceptable levels" of inflation.

"Remarkably effective" is seemingly doublespeak for the total opposite.