[Economics] Josep Oliver: "Once the war is over, the reintegration of the Russian economy will take time"

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The economic think tank Europe G warns that risk premiums may “crack” in the face of a rate hike

The Russian invasion of Ukraine and its consequences in the form of sanctions are the latest economic shock in a century that has not exactly been without them. The duration of the war seems to be a decisive factor in calculating its impact, but the end of hostilities will not mean an immediate return to normality, according to Josep Oliver, PhD in Economic Sciences from the Autonomous University of Barcelona. “Once the war is over, the reintegration of the Russian economy will take time”, he predicted during the presentation at the Madrid Press Association of the report by the think tank Europe G, Financial imbalances in the Spanish economy 2013-2019, effects of COVID-19 and the impact of the ECB's intervention', of which he is the author.

 

The also professor of Applied Economics believes that the conflict will cause excessive inflation to continue, which increases the pressure on the European Central Bank to withdraw stimuli. Oliver believes that the intervention of the ECB has opened a window of opportunity for Spain to reform its productive structure and reduce its indebtedness, but time is running out. Amidst the growing pressure from the countries of central and northern Europe, Frankfurt's support will not be eternal, and the effects of the end of that monetary anti-crisis umbrella deployed by the ECB may be disastrous for the most indebted countries. "When rates rise, risk premiums will start to crackle," he says.

 

Oliver has stressed that the ECB is caught in the dilemma between high inflation and the risk that growth will stall due to the effects of the war in Ukraine. The conflicting interests of the countries of the south against those of central and northern Europe, which are less indebted, pose a complex set of balances for the body, which must set a uniform monetary policy for a group of countries with very different realities.

The study emphasizes that adding all the intervention in the Spanish economy, monetary policy operations have risen from 21% of GDP in 2015 to 72% in the summer of 2021, values "indicative of the extraordinary dependence that stability has on financial institution of Spain from the activism of the ECB”. Another element of vulnerability for the Spanish economy is its excessive dependence on the services sector, higher than the European average, and which not only has not been corrected since the last financial crisis, but has also warned.

 

The expert maintains that despite the deleveraging carried out between 2013 and 2019, the increases caused by the pandemic in private debt, and the unusual records of public debt after covid-19, have placed total public and private debt in the environment of 270% of GDP, only values comparable to those of 2012, in the worst moments of the financial crisis. And those levels are even worse in some southern partners. "Seeing Italy with a public debt of 170% of GDP scares me, because it is not salvageable, it is going back to what we all discussed 10 years ago."

Oliver highlights that the situation of families and the private sector is stronger now than in the last crisis, but public debt is "one of the greatest vulnerabilities" in Spain, so it must continue trying to reduce it, which is not simple in a context like the current one. “The accounts of the public sector are going to be affected worse by any compensatory policy, by the drop in income derived from the fact that the GDP is going to grow significantly less and by the increase in spending linked to stagflation via employment subsidies or pension items. spending to reduce the social cost of the crisis. From the point of view of public finances, the immediate future is bad”, he predicts.

 

Link: https://elpais.com/economia/2022-03-10/josep-oliver-una-vez-termine-la-guerra-la-reinsercion-de-la-economia-rusa-tardara.html