Fiscal support and monetary vigilance: Economic policy implications of the Russia Ukraine war for the European Union by Olivier J. Blanchard and Jean Pisani-Ferry published by PIIE (4/2022).
“Nobody can predict with much confidence how the war in Ukraine will evolve and what its geopolitical consequences will be over the next few months, let alone the next few years. Nevertheless, policymakers must think about the implications of the war and the appropriate responses, realizing that they will need to be adapted as circumstances evolve. Moreover, they must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Brief, focusing on the macroeconomic aspects of relevance for Europe.
We start by exploring the potential implications of the war. We review the various channels through which it is affecting macroeconomic perspectives. The upshot is that although demand, financial, and wealth channels all enter into play, and although the direct budgetary implications of the war matter—because of increased defense spending and the cost of protecting refugees—the war’s main impact on Europe is likely to be felt through energy prices and, to a lesser extent, food prices.
We then discuss the factors likely to determine the evolution of energy prices. What happens depends both on Russian actions, even absent sanctions, and on the effect of potential sanctions on Russia’s behavior. In this respect, one must distinguish between oil (and coal) on the one hand, and gas on the other…”
