Rachel Attard, Head of Media and Communications Strategy, The Malta Chamber

Is the war in Ukraine reshaping Europe and the world?

RACHEL ATTARD, THE MALTA CHAMBER HEAD OF MEDIA AND COMMUNICATIONS STRATEGY

Imagine a small Maltese factory producing wheat-based food products. This local factory opened its doors in January 2022 to record number of absent workers due to the Omicron wave. A month later, the COVID numbers have abated but it faces a shortage of wheat supply as a result of war in Ukraine. First the COVID pandemic and now the war. A double whammy. Who would have thought that after almost two years of fighting a global pandemic, the next thing we would face would be a war on European soil? An unjust and savage war that is killing innocent men, women and children because one man decided to rob them of their right to live in an independent country. The atrocities committed in occupied Ukrainian communities mark a ghastly breach of international law. But does Vladimir Putin’s war also mark a break in the development of the world economy? It is still early to be making such prognoses, but the world is demanding urgent attention, and inflationary pressures are sending shockwaves especially in the energy sector and food markets. It is pertinent to note that the most consequential economic effects are being felt much quicker than the residual effects of COVID are fading out. The war in Ukraine has created a massive, new negative supply shock for the world economy, just when some of the supply chain challenges experienced during the pandemic appeared to be starting to wane. The negative effects of the war are likely to deepen if the conflict continues. Russia and Ukraine are large producers and exporters of key food items, minerals and energy. Data analysis carried out by The Malta Chamber of Commerce, Enterprise and Industry, together with the National Statistics Office (NSO), showed that foodstuff manufacturers are highly exposed to shortages and bound to rise in cost due to their high dependence on Ukraine for items like rice starch, which was imported from the war-torn country in its entirety. Other products that Malta imports from Ukraine include oats, maize starch and crude sunflower-seed oil, with over 80 % of total imports of each one coming from Ukraine. The food manufacturing industry was already being hard-hit by supply chain issues and the Ukraine conflict has simply exacerbated matters. This shortage of staple ingredients is not only being felt locally but also on an international level. This means that there is an acute risk not only of an economic crisis but also of a humanitarian crisis with a sharp increase in poverty and hunger. The economic implications include a systematic surge in inflation spanning both consumer and commodity prices, which is rooted on the supply-side and hence cannot be mitigated by tightening monetary policy.. The sanctions that are being imposed on Russia are crippling its economy, but at the same time the rest of the world is also feeling the economic pinch and needs to find immediate financial and economic solutions. The European Central Bank President, Christine Lagarde, said that the ECB has kept interest rates unchanged, but signalled that it will decrease its asset purchases faster than planned. She emphasised that: "we will take whatever action is needed to fulfill the ECB's mandate to pursue price stability and to safeguard financial stability." On this matter one has to wait and see, since much depends on how long the conflict between Russia and Ukraine will last. Zooming in on the Maltese economy, during one of the debates that the Malta Chamber organised during the electoral campaign, Finance Minister Clyde Caruana said that: “the Maltese Government must do whatever it takes to mitigate the economic crises caused by this war.” Good. But it begs the question…for how long can the government keep subsidising? For how long will taxpayers underwrite this cost? And once the dust settles, at what rate of interest will the accumulated debt be repaid? n