Why the war is likely to speed up the transition towards a greener economy

Russia’s invasion of Ukraine threw a wrench into Europe’s recovery from the COVID-19 pandemic, with rising energy and food prices and the general uncertainty caused by the largest land war on European soil since World War II undermining what many hoped would be a quick economic rebound.

However, the European Union’s determination to wean itself off Russian fossil fuels also means that investment in green energy has moved up the list of priorities.

Local economist JP Fabri, a partner at Seed Consultancy, says that the need for increased strategic autonomy is likely to speed up the green transition, although this may come at a cost.

“Green technologies are set to account for the lion’s share of the growth in demand for most metals and minerals in the foreseeable future,” he says. “The faster and more urgent the shift to a greener economy becomes, the more expensive it may be in the short run.”

With inflation at levels unseen for well over a decade, European businesses and consumers are feeling the pinch. Some nations have tried to take steps to protect their domestic markets, although EU single market rules have largely stopped such attempts in their tracks.

Last month, the European Commission informed Hungary that its move to restrict the export of cereals constituted an “unjustified obstacle” which is “unacceptable and counterproductive for the common goal of food security”.

Mr Fabri explains that there are several elements to consider when discussing and analysing inflation.

“The context and sources of inflation are key elements that need to be discussed,” he says. “On a European level, there are three shocks that have combined to push inflation to record highs.”

First, he points to the series of shocks to input prices and food prices. “These include the failure of OPEC+ to meet production targets, rising natural gas and hence fertiliser prices, and now the ramifications of the war in Ukraine.

“All this has led to surging energy and food prices, with the relative price of energy rising far higher than the individual spikes experienced in the 1970s.”

Then there are also the shocks to both the demand for and supply of industrial goods, which has shown up in record-high industrial goods inflation.

“Demand has been stoked by stimulus policies in major economies and the forced switch in consumer spending from services to goods during the pandemic. Supply, on the other hand, has been constricted by the sluggish rebound of industrial production from lockdowns, transport, and logistics bottlenecks, and now “zero COVID” policies in China once again.”

China’s largest city, Shanghai, has only emerged from a strict two-month lockdown in the last days.

Finally, the shock from economies reopening after lockdowns has triggered a rapid rotation of demand back to services – all while input costs have been rising and companies in the services sector, especially in tourism and hospitality, have struggled to find staff quickly enough to meet rising demand. That has led to rising services inflation.

“This unprecedented combination of shocks has been reflected in broader and more prolonged inflation pressures,” explains Mr Fabri. “On top of these conjunctural shocks, we are also seeing a partial reversal in some of the structural trends that had helped hold down inflation over the past decade.

“The Russia-Ukraine war may well prove to be a tipping point for hyper-globalisation, causing geopolitics to become more important for the structure of global supply chains. That could lead to supply chains becoming less efficient for a while and, during the transition, create more persistent cost pressures for the economy.”

These drivers, continues Mr Fabri, confirm that there is no short-run fix for the inflationary period currently being experienced, although he believes it might subdue following a period of structural adjustment.

“Given that inflationary pressures are driven and affecting key items such as food, the impact is also going to be significant on the low-income earners given that they spend a higher proportion of their income on the necessities.”

He also points to Government support for these income groups and the broader population by cushioning the impact through targeted aid and also by netting out the impact on energy.