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IMF: Europe must use fiscal policy to deal with Ukraine war

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European governments should address the economic fallout from the war in Ukraine through fiscal policy to allow monetary policy to normalize in the face of high inflation, the International Monetary Fund (IMF) said on Friday in Brussels.

In its regional economic outlook for Europe, the IMF said the protracted war in Ukraine will increase the number of refugees moving to the continent, exacerbate supply chain bottlenecks, heighten pressures on inflation and deepen production losses. .

The biggest risk is Russia suddenly stopping supplying oil and gas to Europe, leading to significant production losses, especially in the Central and Eastern regions, the IMF said.

Oil and gas worry

The report said that for the European Union as a whole, a complete interruption of all Russian oil and gas imports could mean a loss of 3% of the Gross Domestic Product (GDP) in 2023, with different individual impact according to the degree of dependence on Russian imports.

“Fiscal policy is better suited than monetary policy to deal with new shocks,” according to the IMF report.

“Automatic fiscal stabilizers should be allowed to operate freely, while additional spending is allocated for humanitarian support to refugees and for transfers to low-income families and vulnerable but viable businesses,” the International Monetary Fund said.

He added that “with inflation well above the targets, monetary policy should maintain the path of normalization. The pace of withdrawal of monetary stimulus should vary according to economic circumstances, advancing more quickly where inflation expectations run the risk of It is important to emphasize that monetary policymakers must avoid the emergence of price/wage spirals”.

The IMF this week projected that, because of the Russian invasion of Ukraine, economic growth in the 19 countries sharing the euro will be 2.8% in 2022, 1.1 percentage points below the January forecast.

*Reproduction of this content is prohibited

Translated to english by RJ983

From Brazil, by EBC News

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