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A growing storm of new energy price spikes, soaring food prices, and corresponding social and economic dangers focus the minds of Brussels officials who worry about multiple cascading shocks across the European Union as a result of Russia’s war in Ukraine.

Seen from the Berlaymont headquarters and the nearby buildings that house the European Commission in the Belgian capital, the conflict raging just over the bloc’s border presents a unique combination of threats looming for the second half of the year.

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A common assumption about how this might happen is first a summer of worry, then a winter of doom. Concerns center on how energy rationing and a worsening cost-of-living squeeze may test voters whose patience is already stretched thin, and how vulnerable Germany’s industrial machine is to shutdowns if the gas supply stops.

Officials across the EU bureaucracy who spoke to Bloomberg for this story, often on condition of anonymity, represent a generation of policy practitioners aware of crises ranging from the region’s sovereign debt turmoil to Brexit. and to the pandemic, giving them the perspective to judge that one is not yet existential.

Even so, the security realignment gripping Europe – inflicting further strain on public finances – and the escalating energy crisis is unchartered territory, the full consequences of which, according to two insiders, have not been felt by policy makers and advisers after two years of Covid -19 emergency.

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A first crystallization of views on the economy will emerge on Monday, as the commission releases forecasts likely to recognize a significant slowdown in economic growth, according to a draft outlook seen by Bloomberg.

What Bloomberg Economics says…

“The impact of the war in Ukraine could still be much larger than markets or the ECB expect and there is still room for escalation. A severe energy disruption could easily tip the eurozone into recession. .

–Jamie Rush, David Powell and Maeva Cousin. For the full report, click here

This will be followed this week by EU measures to counter the energy crisis. Later this month, a new judgment on national fiscal policies is expected to result in an extension of the suspension of the deficit limits the bloc agreed to when the pandemic hit.

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Among the dangers commission officials see looming is the potential for further destabilization of the food market that has been shared between the institutions. Officials fear Russian President Vladimir Putin could militarize the supply of agribusiness, fertilizers and energy exports to inflict economic hardship on the bloc.

This is accompanied by the possibility that the coming winter will be harsher than the relatively mild one that has just passed. That would fuel gas demand just as Russia turns the screw, spurring competition for alternative sources while potentially mobilizing discontent, especially in countries dependent on energy imports like Bulgaria.

Meanwhile, officials are also aware of an influx of refugees from Ukraine now totaling more than 5 million, a tally eclipsing the refugee crisis in 2015-2016 and causing tension, particularly in neighboring countries.

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“We are fully aware of the social pressure,” Maros Sefcovic, vice-president of the committee for interinstitutional relations and foresight, told Bloomberg. “National governments have their hands full because of high inflation, energy prices, the huge wave of refugees. And all this leads to an increase in the cost of living.

In this context, officials consider the multiple economic policy responses deployed as difficult to calibrate.

On the one hand, to fight inflation, the European Central Bank is likely to raise interest rates in July, possibly above zero later this year. Such a tightening could weigh on growth and possibly further squeeze families in debt.

The ECB faces a “very complicated dilemma”, Olli Rehn, a member of the Governing Council and former European Commissioner for Economic Affairs, told reporters in Salzburg earlier this month. “We are facing a very difficult economic environment.”

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At the national level, the level of budget support is mixed. Some pandemic-era fiscal stimulus is filtering through and governments are offering various supports to insulate families and businesses from the energy shock. New military spending is also a competing priority.

At the EU level, officials have more freedom than before to offer aid, with coffers full of funds and no austerity dogma constraining them as in previous crises.

But their 2 trillion euros ($2.1 trillion) funds are already largely committed to farmers, infrastructure projects, national stimulus packages and a growing list of new priorities ranging from independence energy to joint defense projects.

The commission has granted countries the option of offering business grants in the aftermath of the invasion and is discussing how to redirect spending towards energy independence and other critical areas. This could include reprogramming some of the 220 billion euros remaining in their recovery fund.

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The energy package expected this week could include measures to tackle rising household costs and energy poverty.

Meanwhile, the commission’s gloomier economic view on Monday will show a major reduction in its growth forecast for this year from 4% to 2.7%, according to a draft outlook.

Officials are concerned about how the broader consequences of weaker growth could sway voters, aware of the impact of the so-called “yellow vest” protests on the first term of French President Emmanuel Macron, who faces legislative elections in June.

Italy and Spain, the weakest among Europe’s largest economies, will also have national polls next year.

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