The spectre of a double-dip recession haunts Europe

BarcelonaThe W, in all its magnitude, has become a real possibility. After the economic collapse due to covid and a recovery that raised complex calligraphic debates, but in the end left what looked like the symbol for a square root on growth charts, the Russian invasion of Ukraine may once again push Europe into recession. As this would be the second recession, the blows received by the European economy would leave us with a curve closer to a W, a situation already experienced when the 2008 financial and real estate crisis was followed by the even worse relapse of the 2012 public debt crisis.

Different economists consulted by ARA have agreed that the situation is indeed worrying, although there is no unanimity on the impact of the crisis derived from the war. "A new recession is a real possibility," says Pompeu Fabra University professor José García Montalvo. "There is a problem that we did not have in 2012, which is that we have inflation and central banks will not be able to support the economy," he explains. "We have less strength in monetary policy and fiscal policy has already used a lot of resources during the last crisis and it has caught us at a bad time," he adds.

García Montalvo recalls another decisive factor which has been directly impacted by the war: the price of energy. "There are countries that are very dependent on oil, and you have to think that Spain's state budgets were drawn up when a the price of Brent crude was at $58 a barrel, and right now it stands at $119", he points out.

This expert's forecasts are worrying: "If we put inflation together with uncertainty, which affects investment, and confidence, which affects consumption, and add the fall in the stock markets, which implies less wealth, we are left with a bad situation." And Montalvo adds that it could get worse if the conflict drags on. "Now we have a problem of high prices, but it could be much more dramatic if we have a problem of restrictions, which would affect the industrial sector and cause shortages," he says. "This could lead us to a situation very similar to 1973 or 1981, with an energy shock and with some countries, such as Germany, which are really unprepared". For this economist, the situation could lead to stagflation: soaring prices and a stagnant economy.

No winners in Europe

A similar analysis is made by Albert Carreras, professor at the Universitat Pompeu Fabra. He agrees that the moment is bad for the West. "Putin has started the war at a time when the economy was looking up and this does more damage to this situation," he explains. "If it lasts, the war will hurt us all, there will be winners and losers, but there will be no winners in Europe," he points out. In this sense, Carreras explains that the smaller the relationship with Russia, the smaller the impact, and that is why Spain may be among those who suffer a smaller impact in the context of the EU.

"We are heading towards a scenario similar to that of the 1973 oil crisis, when there were a few years of high inflation." That's why he says the possibility of a recession is real. "It is pertinent to think about it. Even if the war lasts a short time, it will have to be seen how it ends, because if Russia retains control of Ukraine, the European Union will not be able to benefit from the massive investment that will be made in the country, which would stimulate the economy." In his opinion, all this forces the European Central Bank (ECB) to raise rates.

Antonio Argandoña, an economist and professor at IESE, takes the opposite view. "I believe that the ECB's decisions will be conservative; inflation will rise temporarily, even if it may not be a short period, but my suspicion is that there will be no drastic measures and that the status quo will be maintained", he says. As for economic policy, Argandoña believes that the dynamics will also be maintained: "It will be an expansive policy, in which measures will be taken to protect people who are in a complicated situation, and even so, I do not believe that there will be a serious recession".

Argandoña claims that the economic impact of the conflict will be "limited" outside the sectors most dependent on Russia and the impact on gas and oil. "No one will get rid of this, but the recession will not be collective," he concludes