Originally published 6 July 2022.

Having claimed the UK will avoid such a fate, I want to explore whether Continental Europe can avoid falling victim to recession. To do so I consider 10 channels through which the recession virus could spread across the Continent and, worse still, its stagflation variant. Let me make clear this is not an exhaustive list of how the EU will succumb to recession. Indeed, it would not need all 10 to happen in short order for recession to be induced.

1. European monetary efforts to ‘deal’ with inflation will actually sow recession.

I am convinced that at a time when the EZ needs to continue with ultra-loose monetary policy, the ECB will make the mistake of tightening. This would not be the first error of its kind, the ECB repeating its mistakes of 2008 and 2011 (see charts 1 and 2).

2. As the ECB pushes rates into positive rate territory, however modestly, it will force a rate response from central banks overseeing policy in nations within the EU but outside the single currency, but very much close to events unfolding in Ukraine (10.0%, 7.5%).

Spare a thought for those EU nations outside of the euro for whom events unfolding within Ukraine are very close to home. I write here of Hungary (5.4%, 9.5%), the Czech Republic (5.75%, 13.2%), Romania (3.75%, 11.7%), Poland (5.25%, 11.4%) and Bulgaria (0.0%, 12.1%). For the most part these nations have already experienced monetary tightening, as reflected in the bracket numbers showing where rates of interest and inflation respectively have most recently reached. As the cost of money and/or goods rises to ever more elevated levels, the capacity to spend cannot fail to fall. And across the EU, these two forces have been rising sharply. These are states whose inflation cost problem will not be eased by raising rates, but rather whose economies will be forced into deeper recessions as a result.

3. Well after hostilities cease – and we can yet see no end in sight – events in Ukraine will continue to take their economic, financial and humanitarian toll across Continental Europe.