By Patrick Rivière, Executive Chairman of La Française Group May 2022
In the aftermath of a global health crisis that disrupted production chains, Russia's invasion of Ukraine, the first cross-border conflict in Europe since World War II, marks a major tipping point not only in a geopolitical sense, but also from an economic and financial perspective. Europe's inability to effectively sanction this invasion painfully demonstrates its quasi-total dependence on Russian fossil fuel imports; a dependency which, placed in the context of “global warming” and economics, advocates for a swifter transition to a sustainable economy.
Key issue of inflation
War is always inflationary, especially when it involves one of the main producers of energy, and industrial and agricultural commodities in the world. The general rise in prices across a number of key economic sectors serves as yet another reminder that in order to guarantee Europe's sovereignty and avoid serious consequences for the European economy, there must be a transition to energy sources that do not emit CO2.
Before the war, the main consensus was that inflation would be tamed in 2022 and start stabilising in 2023, in line with the average level of 2001 2008 – i.e., 1% above the period of low inflation in 2008-2020. We must now add at least 1% more to the trend – i.e., 3% in the euro area and 4% in the USA. But, whatever the outcome of the current direction of monetary policy, the medium-term inflation reality is expected to be higher than in the past, both because the decline in globalisation reduces the benefit of comparative advantages in international trade and the necessary energy transition will increase production costs.
Accelerated trajectory for climate transition…
In tandem with the objectives of the Paris Agreement, Europe can only achieve its energy sovereignty by significantly increasing its investments in low-carbon energies and improving its energy efficiency. The scenario requires a level of investments on par with those made after World War II.
The strengthening of the welfare state and of “whatever it takes” provides a response –if only a partial one – to the question of financing this transition. But what about the new economic reality, namely negative real rates? In the more inflationary environment at present, zero interest rate policies adopted in the aftermath of the global financial crisis have resulted in conditions of strongly negative real interest rates. And given the scale of the investments to be made, real interest rates will need to be kept very low for States to finance these investments.
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