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Energy Crises and Consistent Inflation In the European Union

Harvest Global Markets :

The energy inflation has caused criticalprice instability in the Eurozone and some other European Union countries,weighing heavily on the economic well-being of the bloc. Eurozone inflation is running at 10.7%, the highest level in the bloc’s history, and the ECB has hiked its benchmark rate to 1.5%, a level not seen since 2009, before the sovereign debt crisis.

The ECB released its Financial Stability Review recently, indicating anacute debt pressure on households, businesses,and the government as energy crises continue to pertain in the Eurozone and escalated tension between Putin and NATO put Europe in a vulnerable situation economically. 

Further, challenging the growth is the diversion in the economic outlook within the European area as countries like France and Spain are not as highly dependent on Russian energy supplies as is the European industrial hub – Germany. Along with amplified energy costs, other input costs have also surged in order to cope up with the soaring inflation. Wage rate increases have been in aggressive demand, as households are experiencing decreased purchasing power as a major proportion of their income is spent on energy and food and it has been difficult to maintain a pre-pandemic lifestyle.

The severe shock of higher import energy costs has brought structural shifts in the energy sector and many experts suggest that this will last for a couple of years, as back-to-back winter slumps hit the Eurozone. In order to mitigate the effects of rising energy prices, several governments have begun offering financial assistance to businesses and consumers. However, the potential for fiscal expansion policies that do not raise threats to debt sustainability is constrained by high levels of government debt following the pandemic and coupled with tighter financial conditions.

However, this incongruent situation has fundamentally changed the normal inflationary concerns. As the crisis is only expected to terminate when a full-fledged transition away from Russian gas is finalized.

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