The crisis stemming from Russia’s invasion of Ukraine may drag on and take an even heavier political and social toll. But even if its impact is gradually contained, it will already be significant, at least on the economy. The effect of higher energy and other import costs, changes in the rules of commerce and the sharp rise in uncertainty will linger in the global economy for a very long time. Overall, we should brace for a decline in actual income, mainly as a result of inflated prices, even though not all economies or their sectors will be affected in the same way.
The economic system will, in some respects, absorb the shock waves of the new crisis, as it did with other ones. The credit crisis leaped across the Atlantic in 2008 and threatened to smash the eurozone, but the bloc managed to survive and return to growth. Brexit did not cause as much damage as expected. Anti-globalization sentiment stirred by former US president Donald Trump did not halt trade. Climate change is seen as manageable as long as the rules are upheld; and the unprecedented restrictions dictated by the pandemic were dealt with, and what was a very deep recession at first was eventually reversed. So, maybe what we have is a global economy with the ability to absorb massive shock waves without coming off the rails.
Even though there is no doubting the strength of the economic incentives and ties that have gradually been forged over the four decades of growth that followed the oil crises – and their ability to generate revenues – there is no doubt that the problems are mounting. The 2008 crisis ultimately led to much higher levels of public and private debt, a problem that was exacerbated by the pandemic, and public coffers are going into the red in ever more countries. Brexit was, essentially, an amputation of a dynamic part of Europe, while now it appears that along with its energy policy, it will have to radically change relations on its eastern borders and come to terms with much higher costs for its citizens and businesses.
Despite the ongoing unconventional monetary policy that has been pumping economies with unprecedented liquidity, the mood for investments remains lukewarm and some of the trends prevailing in productivity and labor – the two pillars of growth – are cause for concern. In short, the ingredients for a protracted economic crisis are all there.
If the global economy is looking like a minefield right now, Greece’s one is not without its own challenges. From the pandemic to the inflation crisis that is being exacerbated by the war in Ukraine, what stands out are the sweeping measures being taken to prop up households and businesses. In the meantime, the Greek economy has the support of the European institutions, meaning the possibility of borrowing and direct subsidies.
The demand for support is reasonable: Many households have been brought to their knees by the persistent recession and low incomes of the last decade, and have nothing in savings. Many businesses are likewise skating on thin ice. But support measures come at a cost and have limits, especially in a country which, apart from a massive public deficit and debt, also needs to achieve investment grade.
The risk of complacency, meanwhile, looms large in these extraordinary economic circumstances and kicking the can down the road by relying on public money and borrowing is no solution. Major crises, like the pandemic and the war, inevitably come at a major cost, only a part of which can be met by tapping public funds. This is why it is essential to have systematic policies running in tandem that will bolster production and generate new revenue sources. Without them, fears over the future of the economy may re-emerge fast and strong, a development that would hit right at the center of its weakest spot: its ability to attract medium-term, productive investments. And this is precisely why a reformist agenda is doubly essential, so that there is also a clear picture of where the economy is heading.
Nikos Vettas is the general director of the Foundation for Economic and Industrial Research (IOBE) and a professor at the Athens University of Economics and Business.