The prospect of a fiscal integration
The provision of military support to Ukraine as well as the giant reconstruction costs outlined in Rebuild Ukraine Facility (RUF), imply that the EU will have to issue more common debt. Jacob Funk Kirkegaard argues that this could be the opportunity for speeding up the European fiscal integration:
If the EU adopted an “event-driven” common fiscal capacity, countries with the highest debt levels would acquire the biggest financial market benefits in the form of lower interest rates (e.g., lower spreads to German bonds) from investors factoring in a permanently higher probability of common EU funding in severe future crises. Accordingly high-debt EU and euro area members in Southern Europe would harm their own self-interest if they blocked a large commonly funded RUF, or the long-term future full EU membership for Ukraine. Kyiv represents the best and possibly only chance for them to see additional EU fiscal integration help push down their own national government bond yields.
Will the Russia-Ukraine war speed European fiscal integration?
By: Jacob Funk Kirkegaard – Peterson Institute for International Economics
The economic challenges
Blanchard and Pisani-Ferry in this policy note outline the three main macroeconomic challenges that EU policymakers are facing, namely:
- How best to use sanctions to deter Russia while limiting adverse effects on the EU economy. Towards this goal the authors suggest that embargo or tariffs on oil may have limited effects on consumer oil prices and hence more feasible. But an embargo on gas given technical constraints, and a relatively inelastic supply from other sources is not feasible. An alternative would be tariffs on gas.
- How to deal with the decrease in real income due to the increase in the energy import bill. Blanchard and Pisani-Ferry suggest that lump-sum transfers that do not affect the marginal price, and consequently do not diminish incentives to reduce demand, are preferable, especially if directed to low-income and other most affected households.
- How to deal with the increase in inflation as a result of higher energy and food prices: the danger is for inflation expectations get de-anchored which would imply monetary policy tightening while at the same time weaker aggregate demand, would imply a need to loosen policy.
In each of these three dimensions, there is considerable uncertainty as to the outcome. Energy prices may increase much more than they have so far, or instead return to prewar levels. By implication, the loss in real income and the inflationary pressure may be much larger, or instead be less of an issue than currently forecast. This leads to our last conclusion. Fiscal and monetary policy should be nimble, consisting of measures easy to adjust as the need may be.
Fiscal support and monetary vigilance: Economic policy implications of the Russia-Ukraine war for the European Union
By: Olivier Blanchard, Jean Pisani-Ferry – Peterson Institute for International Economics
How could the war affect the common European identity
In this research, Kai Gehring, used both qualitative and quantitative evidence based on text analysis of newspaper articles and internet searches related to the Russian invasion of Crimea in 2014, to evaluate the effect on European identity and cooperation. He found a significant increase in a common EU identity which was persistent over time. Such increase in common identity translates into higher trust in EU institutions, as well as higher support for cooperation at the EU level. Will the current war have a similar effect?
External military threats help to create a stronger European identity and cooperation
By: Kai Gehring – University of Bern
