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This Economic Survey was prepared by Jan Stráský, Martin Borowiecki and Federico Giovannelli with inputs from Joaquín Calvo Giménez (external consultant), Jean Chateau, Antonela Miho (external consultant) and Francesco Vanni under the supervision of Mame Fatou Diagne. Research assistance was provided by Federico Giovannelli and editorial support by Robin Houng Lee.
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The European recovery has been hit hard by the energy crisis following the onset of Russia’s war of aggression against Ukraine. The post-pandemic rebound in GDP has faded as the impacts of the war unfolded, driving energy prices higher and causing new supply chain disruptions. While private consumption was supported by resilient labour markets, gross fixed capital formation suffered from input shortages and elevated uncertainty.
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The recovery in the European Union and euro area has been disrupted by the energy price shock and the cost-of-living crisis that followed Russia’s war of aggression against Ukraine. EU policies helped avoid a severe downturn, but the near-term outlook is clouded by uncertainty and downside risks. Monetary and fiscal policy need to remain restrictive to lower underlying inflationary pressures. Fiscal sustainability should be grounded in efficient public spending and improved economic governance. To facilitate structural change, barriers in the Single Market need to be reduced further and complemented by an efficient early-stage support for green innovation.
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The EU’s ambitious Green Deal aims at achieving net zero emissions by 2050. The EU is starting from a relatively good position. It has successfully reduced greenhouse gas emissions over the past decade. But further efforts are needed to reach the net zero target. These include an extension of emission trading to agriculture and the phase-out of generous subsidies for fossil fuels. Such efforts should be complemented by additional measures to shift to clean energy, notably more integrated electricity markets and deeper capital markets that provide the necessary investment in new technologies. Accelerating the green transition will also involve costs for displaced workers. Bolstering workers’ mobility and training will help improve labour reallocation and reduce transition costs.