War required three things – money, money, and more money, economic consequences of war

“The current international security system has nearly expired “claims ANDRIY YERMAK, Ukraine’s presidential advisor in his article “The Global System Has Failed. Ukraine Is Showing the World How to Build A Better One”. World failed to remain not only the peace but stability in the EU, the region, where actually international organizations were established precisely for peace and economic cooperation.

Wars are destructive and disruptive, but for economists one of the most important point is that wars are expensive and the effect on working force, capital, resource allocation, trade, and globalization is destructive as well. Large wars constitute shocks of the not only participating countries’ economies, but the whole neighborhood and the world economy. There may occur short-term stimulation and positive aspects and long-term destruction and rebuilding, but war generally hinders economic development. There are some specific economic effects of war across historical eras we can use in analyze.

The king of Spain was advised that conducting the war required three things – money, money, and more money. In response, Spain and Portugal imported silver and gold from America to finance armies, but because of increasing quantities, the value of these metals collapsed.

There are three ways, how the governments pay for war: raising taxes, borrowing money and to print more currency, which rapidly leads to inflation.

From this point of view, we can carefully analyze how already Russia’s war hits its economy and the euro area. Russia’s invasion of Ukraine on February 24 has already caused consequences.

„By initiating a brutal war against Ukraine, Russia has chosen to become much poorer and less influential in economic terms. Even in the short run, sanctions and Russia’s deteriorating economy constrain its ability to wage war and replenish the military manpower and materiel lost in Ukraine. “ – we read in BANK OF FINLAND ARTICLES ON THE ECONOMY, by Iikka Korhonen, Head of BOFIT and Mika Kortelainen, Senior Economist. They introduced us the scenario for both: Russian economy and EU economy as well. They concluded that everybody loses in this war, but the economic prospects for Russia is disheartening.

In the article “Global economic impacts of the Russia-Ukraine war” in EIU, is written a forecast about commodities prices, Supply chains, Global inflation for the following periods as a result of war. Since this article was written on 3rd Mar 2022, we can step by step check if this is already happening. They claimed that commodities prices could jump because of the three factors: concerns around supplies, the destruction of physical infrastructure and sanctions. They emphasized that prices for oil, gas, base metals and grains would jump. As a result we can already notice these.

In the article is mentioned, that supply chains will be disrupted because of the destruction of transport infrastructure. Also, because of the security issues and sanctions any land-based trade routes, air or sea freight on Russia’s territory is not convenient. That makes companies, which operate between EU and Asia, find longer/alternative routes for their supply chain and in most cases it means additional expenses, which itself also increases the prices of products. As a result, the prices and estimate inflation will be high according to the economists.

Unfortunately, in “IMF (International Monetary Fund) Staff Statement on the Economic Impact of War in Ukraine” is mentioned that “this crisis will create complex policy tradeoffs, further complicating the policy landscape as the world economy recovers from the pandemic crisis.” Also how much central banks will raise interest rates in response to inflation is not known. KENNETH ROGOFF states the possible influences of the war on fiscal and monetary policy in advanced economies in his article “THE LONG-LASTING ECONOMIC SHOCK OF WAR” and emphasizes the risk of deglobalization, especially after Covid19 , when world almost experienced it.  

As a result, inflation, uncertainty, supply chain rearrangement have already effected more countries than only Ukraine and Russia. Economic effects of war may cause global crisis and we have examples in history. Hope, the world leaders will accurately examine all the possibilities to stabilize the situation. Europe should have considered, that the economic dependence means political influences as well.

World peace,

Mariam

https://helda.helsinki.fi/bof/bitstream/handle/123456789/18430/Bulletin_analysis_5_5_22.pdf?sequence=1

http://www.joshuagoldstein.com/jgeconhi.htm

https://www.imf.org/en/Publications/fandd/issues/2022/03/the-long-lasting-economic-shock-of-war

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