What does peace mean to the European economy?
The prospect of a peaceful agreement or a ceasefire between Russia and Ukraine has raised a question about its economic impact in Europe.
New analysis by HSBC shows that while direct peace dividends will be simple, some channels can form recovery and continental growth.
The HSBC economist estimates that an eternal or prolonged ceasefire of peace weapons can lift European GDP by 0.2% to 0.3%.
A broader settlement, especially those that restore the flow of Russian energy, can provide a greater encouragement, but the report emphasizes that such results remain uncertain.
Energy supply promises as the most direct channel. The European Union cut its dependence on Russian gas from more than 40% in 2021 to more than 10% in 2024.
HSBC noted that only significant sanctions and great rebounds in Russia’s material supply materially would reduce energy prices.
In one scenario, a 10% decline in gas and oil prices will reduce the Euro zone inflation by 0.4 points percentage for a year, adding about 0.1 points for EU growth.
Lower prices can also help producers regain competitiveness and support consumer trust.
Defense expenditure is another factor. NATO members have committed to increase defense expenditure by 5% from GDP in 2035, including 3.5% for military expenditure.
HSBC hopes that the EU military expenditure will increase by 0.5% from GDP in 2027, lifting GDP around 0.3 percentage points. Peaceful settlement that increases European responsibilities in the region can accelerate this track.
Germany has promised to reach the target of 3.5% in 2029, while the EU countries have shown strong demand for a defense loan program of € 150 billion blocks.
Trading with Russia and the return of Ukraine refugees can also play a role, even though HSBC sees a limited reverse. Before the war, exports to Russia contributed 0.8% of the EU GDP, and Ukraine represented 0.2% of Europe’s direct foreign investment shares.
In migration, the return of a large number of refugees will reduce the supply of labor, but the UN survey only shows 5% intend to return this year.
The main potential driver is the reconstruction of Ukraine. Damage until the end of 2024 was estimated to be $ 524 billion, with the greatest needs in housing and transportation.
European companies can play a major role in rebuilding, but most of the damaged areas are located in the area occupied by Russia, which can limit opportunities.
The EU has made € 50 billion in assistance for 2024-2027 and has proposed up to € 100 billion in grants and loans for 2028-34 through joint debt issuance.
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Source: Investting.com
