ECB Insight: An End to Russia’s War on Ukraine Might Make Little Difference for Monetary Policy
14 April 2022
By David Barwick – FRANKFURT (Econostream) – If Russia’s unjustified war of aggression against Ukraine were to come to an end soon, Europe would breathe a collective sigh of relief at the halting of bloodshed, but European central bankers would not necessarily see a major impact on monetary policy, Econostream understands.
Based on conversations with ECB insiders, an end to hostilities in the coming weeks – some observers are convinced that Moscow wants the war over by May 9 - could bring disappointingly little relief in terms of both inflation and uncertainty.
One person suggested that the implications of peace would depend on the conditions. ‘Because if Russia wins, then Europe faces huge security risks in the future, and you need to start to react to that’, he said. A Russian victory would heighten uncertainty, presumably massively, and motivate substantial increases in defence spending as countries adjusted to a new world order based on might.
Moreover, in the event of a military win by Russia, ‘the reaction is probably not to get away from the sanctions, but to think about more and about how to cope without Russian energy’, he said. That is, energy markets would remain unfavourable from an inflationary point of view.
However, another person argued that, Russia having lastingly established itself as an undependable source of energy, peace of any kind would not call into question democratic countries’ effort to divorce themselves from Russian energy, implying ongoing support for oil and gas prices no matter what.
If a formal peace agreement or the conditions under which peace were reached could be interpreted as a Ukrainian victory, there might be somewhat less uncertainty, but in this case as well, supply chains could not be fully restored immediately.
Moreover, one person said, the immense destruction caused by Russia would give way to a period of ‘huge demand’ associated with the work to rebuild Ukraine. This would be felt as a source of additional price pressures in the euro area, whose governments could be expected to get behind the massive reconstruction effort of a future EU member state.
And as another person argued, with Moscow having demonstrated such untrustworthiness that even a formal peace agreement and the withdrawal of all troops would fail to eliminate doubts as to its intentions, uncertainty is likely to remain very elevated for some time under any circumstances.