war impact
Inflationary wave in the Mediterranean

inflation
© Pixabay

The current inflationary trend is the result of a combination of factors such as production bottlenecks after the pandemic, the post-Covid rush for recovery and, above all, the war in Ukraine. Europe, the US and the various countries in the Mediterranean basin are proving unable to control this historic escalation in energy supply prices.

Eurostat's June data indicate an increase in the eurozone's CPI of 8.6%, compared to May and a rise in the underlying CPI of 3.7%. This rise is mainly due to the 42% year-on-year increase in the energy index, compared with 39.1% the previous month.

On the other hand, in June, the Mediterranean basin showed an average CPI of more than 29%. This average comes from fourteen countries, including the European ones, an average comprising fourteen countries, including European countries, where Lebanon stands out with an index of 211% and Turkey with 78.6%.

In Italy, Draghi resigns after failing to find support from his coalition partners on his anti-inflation measures, having recorded a year-on-year rate of 8.3% in June and an underlying rate of 3.8%. These figures are below average for the eurozone and the Mediterranean area. Greece recorded a rate of 12.1% in June (11.3% in May). Spain, sensitive to sudden economic changes, both on the supply and demand side, presents a year-on-year rate of 10.2% and a core rate of 5.5%. In addition, a new package of temporary measures has just been approved.

It is worth noting the control of the CPI in some Mediterranean countries, such as Israel, which has been closely monitoring its inflation for decades, ever since that rate of 500% in the 1980s. The country obtained an index of 4.4% in June, compared to 4.1% in May. Among the countries with moderate increases are Malta, with 6.1% (5.8% in May) and France with 5.8% (5.2% in May). France is more resilient, as it is more dependent on its nuclear power plants and much less on Russian gas. The nationalisation of the electricity company EDF would have improved expectations.

Although in Maghreb, Morocco showed a better rate, of 7.2% in June (5.9% in May), it is still a bad figure. This is likely due to the rise in food and transport prices, despite subsidies for butane gas, basic foodstuffs the transport sector, totalling nearly 3 billion euros.

Tunisia, a country at a political impasse, embroiled in a pre-war financial crisis, recorded a June rate of 8% against 7.9% in May.

money
© Pixabay

For its part, Algeria, after relaxing taxes and restricting imports to tackle the inflation that has been dragging on for years, the "April" figure (in the absence of the May and June figures) reached double digits of 10% and a June rate at least close to that of Egypt is expected, with a year-on-year rate of 13.2%, compared to 13.5% in May. Inflation on food imports in general, more specifically that of grains, is punishing both Algeria and Egypt, despite the fact that they are gas exporters.

Lebanon, in a political, economic and financial crisis, shows a year-on-year increase in May, out of control, of 211%. It is followed by Turkey with 78.6% in June. A galloping inflation that both countries have been accumulating since before the Russian aggression in Ukraine.

This spread and escalation in the level of inflation in Europe and in the Mediterranean basin, where drought and fire are raging, is due to differences in household consumption patterns and how much energy and food can fit in one’s cart. In contrast to the Euro-Mediterranean countries, in Algeria, Egypt and Turkey, the situation is worsening with the cumulative depreciation of their respective currencies against the dollar. In others, such as Lebanon, it is further aggravated by the level of debt.

On the other side of the Atlantic and despite consecutive increases in the benchmark rate by the US Federal Reserve (Fed - the last one in June, of 75 points to 1.5% - the rise in the CPI has not stopped, from 8.3% in April to 8.6% in May and 9.1% in June. The European Central Bank (ECB) has just done the same by raising the key interest rate by 50 points after eight years in negative territory.

Likewise, in March, the Central Bank of Egypt (ECB) raised the rate by 100 points to 9.75%, improving the June CPI by only three tenths of a point. And in May, the Tunisian monetary authority decided to raise the key interest rate by 75 base points, to 7% and by 100 base points on deposits of 6%, thus rewarding savings over consumption. One month later, the year-on-year CPI rose by one tenth of a point in June.

In the case of Turkey, it is not the rates that are rising, but the minimum wage, which has already undergone two major updates. The second-round inflationary spiral seems difficult to stop.

food price
© Pixabay

Restrictive monetary policy favours a curbing inflation on top of already weak economic growth, with the risk of stagflation. The war in Ukraine is not just a warming of the economy. Its consequences lead to inflation on the energy supply side, with negative cascading effects in other sectors.      

Acting on the demand for Russian hydrocarbons in pursuit of a certain scenario, such as total disconnection, means taking control of the crisis, however painful the decision may be, as it avoids uncertainty and Putin's blackmail. However, all indications are that the EU remains blind to the alternatives, thus signing off reversal of its transition to renewables.

Ukraine's continued sophisticated rearmament foreshadows a long war and long-lasting inflation, where transitional anti-crisis measures will be of little use in surfing the wave.

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Helena von Hardenberg, Presse und Digitale Kommunikation
Helena von Hardenberg
Press Officer and Deputy Press Spokesperson Foreign Offices
Phone: +49 30 288778-565