Sanctions are an economic tool that harms the person on whom they are imposed, but they cannot help but harm the person who imposed them, especially if these countries are economically linked to each other. The impact of the sanction war against Russia is a clear example of this concept. Let’s look at Europe:
The European Union became the main actor that imposed sanctions on Russia, which hit the European economy. In April the record inflation rate was 7.4%, in May the record was broken and inflation reached 8.1%. In addition to currency hikes, an important trigger for inflation was the rise in energy prices. The last time such a sagging economy was seen was in 1999, when the whole world was going through the 1998 crisis. Energy prices rose 39.2%, which is almost 40% higher than all previous prices. Higher prices for food, alcohol and tobacco products contributed to inflation, but here prices rose by 7.5%. In fact, there has been inflation in the EU before, but the Ukrainian crisis served as a catalyst.
Estonia, Lithuania, and Bulgaria recorded the highest inflation rate among the EU countries. In Estonia, inflation reached 19%, Lithuania – 16.8%, Bulgaria – 14.4%. The Czech Republic (14.2%), Romania (13.8%), Latvia (13%), Poland (12.4%), and Slovakia (11.7%) were also among the countries with high consumer price inflation. In March, Eurostat reported that annual inflation in 19 euro-area countries in February accelerated to 5.9%. Annual inflation in the Eurozone was 6.2% in February 2022, up from 5.6% in January. The highest annual inflation rates were recorded in Lithuania (14%), Estonia (11.6%), and the Czech Republic (10.0%). The European Commission’s May 16 report reported that prices rose in annualized terms from 4.6% in Q4 2021 to 6.1% in Q1 2022. Total euro area inflation for April 2022 was 7.5%, the highest on record.
The Europeans are thinking about what to do. At this stage, the most reasonable solution seems to be an interest rate hike, which has not happened since 2011. Christine Lagarde, head of the European Central Bank, expressed this idea at the beginning of May. She also said that the European Central Bank will try to take other measures, for example, to stop buying government bonds, and after that, the interest rate will be raised.
France and Germany will take several measures to optimize the economy to stop the acceleration of inflation. The inflation rate in Germany was close to 7.9% in May. According to the estimates by the standards of the European Union, the price increase amounted to 8.7%. As a measure to resolve the crisis, the government of the country has reduced the tax on gasoline and diesel fuel, and from June 1 has introduced concessional fares on public transport. On June 1, Chancellor Olaf Scholz, a Social Democrat, said he wanted to bring employers and unions together in “concerted action” to find ways to prevent an inflationary spiral.
The French economy shrank 0.2% in Q1 compared to the previous three months. The government has taken many steps to protect people and businesses from inflation, for example by limiting the rise in energy prices to 4%. France has one of the lowest inflation rates in the Eurozone. In addition, the government is currently working on new measures to protect the purchasing power of the French.
Inflation is distributed unevenly across the map of Europe and depends on the country’s dependence on Russian energy. The economies of the Baltic States were hit hard because they actively imported Russian gas, least of all Malta, where inflation was 5.6%. It should be taken into account that before the Russian sanctions, energy prices were gradually rising.
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