This edition of State of the Union focuses on the crucial visit of Ukrainian president Volodymyr Zelenskyy to the U.S., the latest economic forecast by the EBRD and attempts to support the struggling German car industry.
For weeks now, Europe is anxiously looking at its number one economic powerhouse, Germany – to be more precise: at the country’s ailing car manufacturers, some of Germany’s industrial pillars.
A serious car crisis in the Federal Republic, triggered by a quasi-collapse of the electrical vehicle market, could have severe consequences elsewhere in the EU.
Threats of historic job cuts, plant closures at Volkswagen and plunging earnings at Mercedes-Benz and BMW prompted emergency talks at Berlin’s economy ministry this week.
But given strained federal finances and fights with China over tariffs, the government’s toolbox is rather empty.
Nonetheless, economy minister Robert Habeck expressed his willingness to help but excluded quick fixes: “Everyone has said that planning is the most important thing. And that means long-term planning. Not a flash-in-the-pan action, because this only has the effect of pumping up the market again in the short term and then possibly collapsing again.”
Germany is in the uncomfortable position today to be forced to re-orient its entire manufacturing sector that depended on cheap Russian energy.
You can already hear Ukraine’s president Zelenskyy shouting: “I told you so!”
Zelenskyy was at the United Nations this week to drum up support for what he called his “victory plan”.
He also reacted to pleas from the European far-left and far-right to negotiate with Russia:
“We know some in the world want to talk to Putin. We know it. To meet, to talk, to speak. But what could they possibly hear from him? That he’s upset because we are exercising our right to defend our people, or that he wants to keep the war and terror going just so no one thinks he was wrong.”
How the Ukrainian economy keeps suffering from the war was detailed this week by the latest outlook from the European Bank for Reconstruction and Development.
The EBRD covers not only Ukraine, but large parts of eastern Europe and central Asia. The bank’s findings are an important bellwether for the global economy.
We spoke to Beata Javorcik, the chief economist of the EBRD.
Euronews: So, your latest Regional Economic Prospects report is called “Along the adjustment path” – that sounds like a friendly way of saying “It’s disappointing”. What do the economies you invest in need to adjust to?
Javorcik: Well, the situation in Europe remains quite challenging. We continue to have very high prices of energy. Particularly the price of natural gas is five times as high as in the US. The demand for exports, particularly from Germany, is muted. Given the difficult situation of the German economy and, finally, the costs of borrowing continue to be high, there is this extra risk premium, this extra interest rate. Countries in the regions had to pay when the war in Ukraine started. And this risk premium continues to be there.
Euronews: On the upside are a decline in inflation and an increase in real wages. What exactly happened?
Javorcik: Well, by historical standards we have seen a very fast disinflation process, though of course the adjustment is not done yet. Inflation remains above the pre-COVID level, but on the positive side we have managed to avoid a hard landing. So, this fight with inflation has come without very big unpleasant effects in terms of unemployment. As the inflation episode started, we saw a big decline in real wages, but then real wages started catching up. That was visible in the last few months in the last year. They are not yet back to the pre-COVID trend, but they have certainly caught up in a significant way.
Euronews: I guess there are still some remaining inflationary pressures – what are they?
Javorcik: Inflation still remains high in some countries, such as Turkey or Egypt, still in high double digits. And depreciation of domestic currencies, which has made imports more expensive, has contributed to further inflation.
Euronews: One country is still in the spotlight: Ukraine. How are they coping with the ongoing war economically?
Javorcik: Well, despite the war early this year, so in the first quarter, Ukrainian economy managed to grow very fast. The bleak Black Sea corridor allowed Ukraine to export grain as well as metals and ores. But then this heavy bombing and destruction of electricity infrastructure happened. And that made the situation very difficult. There are rolling blackouts. There are shortages of electricity. The country is importing electricity from Europe, but it comes at a higher cost. And that’s weighing down on the economy.
