Risks and Trends

Risks and Trends: how to survive stagflation

Preview 2022-10-20
At the Polityka Insight conference on 24 October, we will talk about what action should be taken in a situation of simultaneously rising inflation and falling GDP dynamics.


What policies to adopt at a time of stagflation? The rate of consumer price growth in most developed countries has reached dynamics not seen since the early 1980s. In the USA, inflation stood at 8.2 per cent in September, in Germany at 10 per cent, in the United Kingdom at 10.1 per cent, and in Poland at 17.2 per cent. At the same time, the global economy is decelerating sharply. "How to survive stagflation?" - will be the question we will ask the participants of a panel under the same title at the Risks and Trends conference. According to the latest IMF forecasts, global GDP growth will slow to 3.2 per cent this year and 2.7 per cent next year from 6 per cent in 2021. The slowdown will be felt more strongly in the developed countries, where GDP growth will fall to an average of 1.1 per cent in 2023 (some countries such as Germany, Italy, and Sweden will even experience a mild recession). As the World Bank already pointed out in July, such a combination of economic dynamics raises the risk of stagflation, i.e. the perpetuation of high inflation with very low economic growth. It poses a major challenge from the point of view of policymakers, as it requires a good alignment of fiscal and monetary policy.

Is it possible to bring inflation down painlessly? The last time stagflation occurred in developed economies was in the 1970s. For nearly a decade at the time successive energy shocks combined with expansionary fiscal policy and excessively low interest rates translated into sustained elevated inflation, which in turn dampened economic growth, leading to unemployment. Governments sought various, often unorthodox measures to overcome stagflation - from price and wage controls to quantitative limits on lending. However, it was only the strong tightening of monetary policy and the ensuing recession that ended the period of stagflation in the early 1980s. The current actions of governments and central banks resemble those of half a century ago. Interest rates, although rising, are still lower than the rate of inflation, and politicians are introducing one protective measure after another - from additional levies on corporations to price controls and indirect tax cuts. The moves are aimed at protecting citizens from the effects of rising inflation, but in many cases only succeed in postponing the rising prices.

How to prevent fiscal crises? Stagflation hits the state budget as hard as it hits household budgets. Although high inflation initially leads to an increase in tax revenue and a reduction in the public debt-to-GDP ratio, in subsequent years the combination of low economic growth with high interest rates and large claims by groups dependent on the state (e.g. public sector employees, pensioners), leads to an increase in the deficit and overall debt. If this is compounded by turmoil in the currency markets, poorer countries and those with high levels of debt can spiral into fiscal crises and, in extreme cases, go bankrupt. To address this threat, central banks are using increasingly unconventional monetary policy tools. For instance, the ECB has started to raise interest rates at the same time as it has launched an emergency purchase programme for eurozone bonds, which it can use if the fiscal stability of any of the countries in the monetary union is threatened.

Will stagflation stop the energy transition? An additional problem caused by the simultaneous increase in financing costs and slower economic growth is that companies are less willing to make investments, including those to green their operations. At the same time, governments, in order to protect consumers from the rising costs of energy prices and for fear of overdependence on Russia, are liberalising what were previously stricter emissions requirements for the energy fuels used. In Poland, a return to coal is taking place and in Germany, the extension of nuclear power plants is being advocated. In addition, the freezing of gas or electricity prices discourages households from reducing their energy consumption and ensuring the thermal efficiency of their homes. This could lead to a delay in achieving the goals set out in the European Green Deal.


The panel "How to survive stagflation" will be attended by Paweł Borys - President of the Board of the Polish Development Fund, who is responsible for financing and implementing a number of programmes supporting the development of the Polish economy, Julia Patorska - expert in the field of economic and environmental analyses, associate partner at Deloitte, Jan Piotrowski - economic editor of the weekly "The Economist", and Gallina A. Vincelette - EU director at the World Bank and economist specialising in research into sources of economic growth.

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dr Adam Czerniak
PI Alert

EU summit: Member States launch discussion on financing joint defence initiatives

State of play

Leaders approved appointments to top posts. At the EU summit that ended on Thursday night, they nominated Ursula von der Leyen for a second term as head of EurCom, former Portuguese Prime Minister António Costa as head of EurCou and Estonian Prime Minister Kaja Kallas as head of EU diplomacy. Italian Prime Minister Giorgia Meloni abstained from voting for von der Leyen and voted against Costa and Kallas. This means that Meloni is preparing for tough negotiations and may demand a high political price in return for his party's support for von der Leyen in her approval in the EurParl. Prime Minister Viktor Orbán voted against von der Leyen and abstained on Kallas.

They adopted the Union's strategic agenda for 2024-2029. Over the next five years, the Union's goals include a successful digital and green transformation by "pragmatically" pursuing the path to climate neutrality by 2050. Another objective is to strengthen the EU's security and defence capabilities.

Von der Leyen spoke of EUR 500 billion for defence over a decade. This was the EurCom estimate of needed EU investment presented by its head at the EurCou meeting. Poland and France were among the countries that expected the EurCom to present possible options for financing defence investments before the summit, such as EU financing of common expenditure from a common borrowing. This idea was strongly opposed by Germany and the Netherlands, among others. In the end, von der Leyen decided to postpone the debate until after the constitution of the new EurCom, i.e. in the autumn. And the summit - after von der Leyen's oral presentation - only launched a preliminary debate on possible joint financing of defence projects.

Poland has submitted two defence projects. These might be co-financed by EU funds. On the eve of the summit, Poland and Greece presented in writing a detailed concept for an air defence system for the Union (Shield and Spear), which Prime Ministers Donald Tusk and Kyriakos Mitostakis had put forward - in a more general form - in May. In addition, Poland, Lithuania, Latvia and Estonia presented the idea of jointly strengthening the defence infrastructure along the EU's borders with Russia and Belarus. Poland is pushing for the EU to go significantly beyond its current plans to support the defence industry with EU funds and agree to spend money on defence projects similar to the two proposals. But EU states are far from a consensus on the issue.

Zelensky signed a security agreement with the Union. The document, signed by President Volodymyr Zelensky in Brussels, commits all member states and the EU as a whole to "help Ukraine defend itself, resist efforts to destabilise it and deter future acts of aggression". The document recalls the EUR 5 billion the EU intends to allocate for military aid and training in 2024 (in addition to bilateral aid from EU countries to Kyiv). It says that "further comparable annual increases could be envisaged until 2027, based on Ukrainian needs" i.e. it could amount to up to EUR 20 billion. Ukraine's agreement with the EU comes on top of the bilateral security "guarantees" Ukraine has already signed with a dozen countries (including the US, UK, Germany, France, Italy). As Prime Minister Donald Tusk confirmed in Brussels, talks are also underway between Ukraine and Poland on the text of mutual commitments on security issues.

PI Alert

KO wins elections to the European Parliament

KO received 38.2 per cent of the vote and PiS 33.9 per cent, according to an exit poll by IPSOS. Konfederacja came in third with 11.9 per cent, followed by Trzecia Droga with 8.2 per cent, Lewica with 6.6 per cent, Bezpartyjni Samorządowcy with 0.8 per cent and Polexit with 0.3 per cent. According to the exit poll, KO gained 21 seats, PiS 19, Konfederacja 6, Trzecia Droga 4 and Lewica gained 3. The turnout was 39.7 per cent.

According to the European Parliament's first projection, the centre-right European People's Party (EPP), which includes, among others, PO and PSL, will remain the largest force with 181 MEPs in the 720-seat Parliament. The centre-left Socialists and Democrats (S&D), whose members include the Polish Lewica, should have 135 seats, whereas the liberal Renew Europe club (including Polska 2050) will have 82 seats. This gives a total of 398 seats to the coalition of these three centrist factions (EPP, S&D and Renew Europe) on which the European Commission under Ursula von der Leyen has relied on so far. The Green faction wins 53 seats according to the same projection, the European Conservatives and Reformists faction (including PiS) 71 seats and the radical right-wing Identity and Democracy 62 seats.