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War's impact on Luxembourg firms, poverty likely minimal - EIB

War's impact on Luxembourg firms, poverty likely minimal - EIB

by Yannick LAMBERT 2 min. 14.06.2022 From our online archive
Luxembourg's export-orientated firms may not be affected at all, according to the EIB's projections
The EIB headquarters in the Kirchberg area of Luxembourg
The EIB headquarters in the Kirchberg area of Luxembourg
Photo credit: EIB photo library | LW archive

Russia's aggression against Ukraine is likely to have only a marginal impact on Luxembourg's companies and poor even as it upends Europe's recovery from the pandemic, the European Investment Bank said on Tuesday.

Whilst rising inflation caused by the war's disruptions could push more Europeans into poverty, that risk is lowest in Luxembourg, Austria, Malta and Cyprus among EU countries, the Luxembourg-based EIB's economic models suggest. 

Even with the war's economic consequences of higher energy and food prices, the share of Luxembourg's population that risks falling into poverty is almost unchanged at just under 20%, a rate higher than in France, the Netherlands and the Czech Republic, but lower than in Germany, the EIB report said. The Grand Duchy is less affected by inflation thanks to higher household savings and incomes, a factor shared by richer countries in northern and western Europe, according to the report.

"In the current crisis, policies need to be deployed to reduce risks for vulnerable households and to maintain social inclusion," the multilateral lender said in a statement. 

EIB simulations also indicate that the share of companies across the European Union operating at a loss could increase from 8% to 15% in one year. The share of firms at risk of default could rise from 10% to 17% over the same period, the report said. Chemicals, pharmaceuticals, transport, food and agriculture are the hardest-hit sectors, the EIB said.

Luxembourg's export-orientated firms would not be affected at all, according to the EIB's projections, whereas the increase in the country's energy firms reporting losses would be marginal. Luxembourg companies faced some of the EU's lowest levels of risk. Only Finland, Denmark, Malta and Cyprus companies were projected to have less risk of losses or none at all, the EIB said.

Businesses in countries closer to Ukraine and Russia, such as Hungary, Poland, Latvia and Lithuania, are more exposed, whereas companies in Greece, Croatia and Spain are also predicted to suffer more than the EU average.  

The impact on banks should remain contained, the EIB said, because with the exception of a handful of examples Europe's banking system has little direct exposure to Ukraine, Russia and Belarus. But firms' access to external sources of finance may grow tighter, the Luxembourg-based bank said.

After the start of the war, Luxembourg's finance ministry and financial regulator CSSF said the exposure of country's financial system to Russia sanctions would be comparatively small and could be well managed. 

Money from the EU's post-pandemic Recovery and Resilience Facility, raised by borrowing committing all member states to repayment, could give governments fiscal room to cope with higher energy prices and increased military spending at the same time that tax revenues are likely to drop lower than planned given reduced economic activity, the EIB said. 

 The EIB expects economic growth in the European Union to fall below 3% in 2022, down from the 4% growth this year that the European Commission estimated before Russia's invasion in February. 

"A recession could happen, and further trade disruptions or increased economic sanctions would increase the risk for the European economy", the EIB said.

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