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���������ֳ�-London-17 March 2022: Russia’s invasion of Ukraine and the resulting sanctions present growth and fiscal challenges for eurozone sovereigns, ���������ֳ� says. Their combined impact and the design of policy responses will be important in assessing the sovereign credit impact.

Like the pandemic, the war is an external shock that will be felt across the bloc and its impact will vary, for example with dependency on Russian gas, or trade linkages. The fiscal impact will reflect policy responses and how far their costs might be mutualised at the European level.

The energy market is the main macroeconomic transmission channel via higher prices. Russia accounted for 38% of EU natural gas imports and 23% of oil imports in 2020.

The growth hit depends on the scale of disruption, including through energy availability and prices. Disruption would be significantly greater should energy be rationed, while the invasion could prolong supply-chain disruptions. We will update our 2022 eurozone GDP forecasts in next week’s Global Economic Outlook, with downward revisions likely. The ECB is under less pressure to raise policy rates than the Fed, but announced faster asset purchase tapering in March, and we expect it to start normalising monetary policy.



Long debt maturities mitigate the impact on sovereign borrowing costs, but the ECB has been a major buyer of eurozone sovereign debt in recent years. Most sovereigns’ primary spending at end-2021 remained well above 2019 levels. Further spending pressures from the war imply that governments may face difficult fiscal choices to keep debt-to-GDP ratios declining.

Growth effects from other transmission channels should be less material. Excluding energy, direct trade links are limited. They are higher for the Baltic states, but these include re-exports to Russia. Major western European banks had about USD100 billion total claims on Russian and Ukrainian counterparties at end-September 2021. Foreign direct investment (FDI) exposure to Russia is limited, with Cyprus and Luxembourg the main exceptions, but widespread use of special-purpose entities inflates headline FDI figures obscures the impact on the real economy.



Governments will continue using fiscal policy to mitigate the impact of inflation on households and businesses, a view supported by the European Commission’s fiscal policy guidance for 2023. The conflict will have budgetary costs via the refugee crisis and increased defence spending.

Fiscal costs are likely to slow deficit reduction compared with our expectations at the start of 2022, with the full impact partly dependent on energy prices. We expect more targeted policies than in the pandemic – the war represents a supply shock rather than primarily a demand shock, and governments may be warier of large-scale stimulus given high inflation.



The European-level policy response is focusing on structural energy market changes. The Commission’s REPowerEU package aims to rapidly diversify energy supply, but increased LNG imports and the required infrastructure may be costly.

Fiscal consequences will reflect whether and how European authorities mutualise some costs, for example by extending joint borrowing programmes initiated to support pandemic responses, or re-deploying Covid-19 recovery funds. This could embed entities and mechanisms from previous crises deeper into the EU’s institutional architecture.

The recent ‘Versailles declaration’ did not reference specific joint borrowing programmes, but new schemes involving additional borrowing by the Commission remain contentious among EU member states. Nevertheless, we think the policy response to another common shock with asymmetric impacts will entail some burden-sharing.

We think the conflict makes greater flexibility in EU fiscal rules from 2023 more likely. The Commission guidance said the requirement to cut public debt every year by 1/20th of the excess above 60% of GDP would not apply next year, and no new excessive deficit procedures will begin this spring.

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