COVID-19 and the war in Ukraine require Europe to conduct several policies. Several changes will be needed if Europe is to make a considerable public and private investment effort, economists at Natixis report.

Europe looks set to become a “war economy” for a long time

“Given the huge need for public spending and public and private investment in the wake of COVID-19 and in response to the war in Ukraine, Europe is heading towards a war economy. It will have to retain its savings and tolerate high fiscal deficits and low interest rates despite inflation.”

“European growth will first be weakened by the rise in energy and other commodity prices and by supply difficulties. But in the medium-term, the huge public and private investment effort are likely to lift potential growth.”

“European equity markets will first be hit by higher risk aversion, higher energy and other commodity prices, capital losses in Russia, etc. But they should then be bolstered by: Fiscal deficits; Higher private investment; Extremely negative real interest rates.”