How the “Sanctions War” with Russia impacts the European economy

14.07.2015933

G7 summit participants pose for a picture before their first meeting in the hotel castle Elmau in KruenEurope Insight had access to the full version of the report “Effects of the EU-Russia Economic Sanctions on Value Added and Employment in the European Union and Switzerland” by the Austrian Institute of Economic Research (WIFO). Russian and foreign publications had reported on it back in June, but it was only published in full in early July.

Attempts to assess the effects of the sanctions were undertaken on a number of occasions, particularly with regard to their impact on Russia. Researchers explicitly, and sometimes even literally, presented the line of argument that the greater Russia’s economic losses, the sooner it would modify its policy towards Ukraine. Instances of this may be found in reports by the EU Institute for Security Studies and the British Chatham House.

In turn, attempts to evaluate the multifaceted implications of the “sanctions war” for the EU as a whole were practically not undertaken in public. Individual figures were occasionally cited – including by the European Commission, for example, for agriculture – but that is the extent of it. Additionally, it is only the generalized summary indicators which are usually provided; and these give no clear sense of how they were obtained or what the situation is in individual countries.

It is in this regard that the new report differs significantly from its predecessors. True, its authors start off with the very same general conclusions that can be found in the analytical writings of various “think tanks”. They note that the direct economic impact of the mutual sanctions exchange is minimal on the European economy. Moreover, it is attenuated as the sanctions did not affect existing contracts. At the same time, researchers are not embellishing the current economic situation at all. In their opinion, however, it has come about as the result of the general crisis nature of relations between Russia and the European Union, as well as the recession in Russia which had begun producing a negative effect even prior to the sanctions.

It is with a combination of factors that they explain the drop in economic indicators already taking place and predicted. In the short term – in fact now – they will affect from nine hundred thousand to slightly more than 1 million jobs; and direct economic losses could reach €42bn. In the long term (taking into account the decrease in household expenditure), this means up to 2.7 million jobs will be affected by this blow and that losses could grow to €113bn. For employment, the specified value is within the ranges of 1.2% at the pan-European level; for added value – 0.9%.

3452353245The consequences for individual countries are also very noticeable. This mainly affects exports to Russia where the most painful blow fell upon Austria (-37%), Spain (-40%), and Estonia (-49%). Overall, exports from the EU and Switzerland in the first quarter of 2015 decreased by 33.3%. Malta was the only country where exports to Russia grew despite the general trend – and by 157%. The authors of the study do not specify why this is so.

A similar situation is observable in the tourism sector. From November to April, the number of overnight stays of Russian tourists in Europe considerably reduced; in Spain by 40%, in Austria by 30%, and in Switzerland by 25%. In total, according to estimates from the Austrian institute, during this winter period, the European economy lost over €3.5bn due solely to the decrease in tourist flow.

Modelling the economic effects also makes it possible to see which industries have suffered the most: those related to food and agricultural products, equipment and vehicles, and tourism. The greatest losses are expected in the real estate transaction market – upwards of €10bn.

One of the main factors contributing to the volume of loss was stated by the authors to be a country’s geographical proximity to Russia.  However, it is sufficient to look at a graphical representation of the data to perceive that in the long term it is the largest states – Germany, Italy, France, Spain, Great Britain, and Poland – that will suffer the most in absolute terms.

Their attempts to arrange the supply of goods to other countries, as the report called for, has already partially compensated for producers’ losses. But this is far from possible in every case. And for many industries, finding a replacement analogous to the Russian market will be extremely difficult, if even feasible.

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