The impact of the war in Ukraine on the European Union's economy

Bruegel's article assessing impacts of the war in Ukraine on EU economic policy. According to its estimates, the EU will face additional challenges that will have a large budgetary impact, costing an additional 175 billion euros or around 1.1-1.4% of GDP in 2022. It remains to be decided how this surge will be financed (taxes and debt) and how should this cost be shared between individual member states and the EU.

• Main impacts to the EU economy: the supply shock triggered by the increase in oil and gas prices, the impact of geopolitical threats on household confidence and investors’ sentiment, the need to assist millions of war refugees and the increasing spending in security and defense and in a new EU energy system.
   
• Ukraine´s war economic impacts with short-term direct budgetary cost for the EU and its members could sum up to €175 billion or about 1.1 to 1.4% of GDP in 2022:
  -  €50 billion to contain the domestic price consequences of an aggravated supply shock through transfers, tax cuts and administered price controls.
  -  €75 billion to launch an energy independence plan to reduce dependency from Russia.
  -  €30 billion to mutualise the cost of welcoming refugees from Ukraine.
  -  €20 billion on security and defense in 2022, and twice as much in 2023.
  -  Further expenditures are called for in the medium term, especially on energy security and defense.
   
• The new emergency is likely to frustrate hopes for normalization post-COVID-19. Now policymakers must join forces to tackle new emergencies. The war asymmetric shock (some countries in the EU will be more affected) will imply a cost-sharing as it was the case of the next Generation EU off-budget scheme. These additional costs will disturb the structural consolidation planned for 2023 and beyond and are likely to aggravate public debt-sustainability concerns in the most fragile member states.