Policy brief

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions and avoid taking measures that contradict each other.

Publishing date
29 April 2022

This Policy Contribution is a version of a Policy Brief published by the Peterson Institute for International Economics. The authors thank Thomas Belaich for research assistance, and Agnès Bénassy-Quéré, Steven Fries, Philip Lane, Elina Ribakova, Guntram Wolff and PIIE colleagues for their comments. Throughout this Policy Contribution, we take mid-April as the cutoff date for data.

For Europe, the war in Ukraine is a first-order economic shock. While the direct fiscal implications of taking care of refugees, increasing military spending and strengthening energy autonomy remain limited, the impact of elevated energy and food prices on national income and its distribution is potentially significant. This raises three macroeconomic challenges for policymakers:

  • How best to use sanctions to deter Russia while limiting adverse effects on the European Union economy: in this respect, it is important to distinguish between oil and gas. For oil, Russia can diversify away from the EU market and, despite sanctions, sell on the world market where it operates as a price taker. For gas, the European Union has substantial leverage because Russia depends on the pipeline infrastructure linking it to the European market. However, gas supply from other sources is relatively inelastic.
  • How to deal with cuts to real income because of the increase in the energy import bill: if governments want to protect buyers, they must decide on mechanisms and how to finance the extra spending. Fiscal support and thus some additional deficit finance may be needed, though debt should remain sustainable.
  • How to deal with the increase in inflation as a result of higher energy and food prices: there is a need to avoid a de-anchoring of inflation expectations, which is even more challenging than usual given that inflation had already substantially increased before the war. Preventing this risk would call for a tightening of monetary policy. However, the loss of real income is likely to lead to weaker aggregate demand, implying a need to loosen policy.

Policymakers must cope with these conflicting objectives, ensuring that policy instruments complement each other. A combination of well- designed fiscal support to households and tripartite wage discussions may help soften the trade-off the central bank faces. However, the outcomes of the war in Ukraine are unpredictable, and policy must be able to respond quickly to changing circumstances.

Recommended citation
Blanchard, O. and J. Pisani-Ferry (2022) ‘Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union', Policy Contribution 06/2022, Bruegel

About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry holds the Tommaso Padoa Schioppa chair of the European University Institute. He is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

  • Olivier Blanchard

    Olivier Blanchard is the Robert M. Solow Professor of Economics emeritus at MIT. He joined the Peterson Institute for International Economics as the first C. Fred Bergsten Senior Fellow since 2015. A citizen of France, Blanchard has spent most of his professional life in Cambridge, MA. After obtaining his PhD in economics from the Massachusetts Institute of Technology (MIT) in 1977, he taught at Harvard University, and returned to MIT in 1982. He was chair of the economics department from 1998 to 2003. In 2008, he took a leave of absence to be the economic counselor and director of the Research Department at the International Monetary Fund.

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