Europe was struggling: an ageing population, decreasing exports and a declining economy all contributed to a disastrous few years, however the Covid – 19 pandemic exacerbated the situation. For the first time, the continent was under siege from a devastating virus, businesses closed down and millions of struggling Europeans enveloped into poverty on a daily basis. Leaders had no answer and desperate efforts were made to correct the course of the economy, some of which linger to this day as the world normalises. 

The pandemic left the European economy in agony and distress with the labour force shrinking down by 5 million people in the first half of 2020 and unemployment levels spurting up by 3.2% as the Euro area labour market experienced a devastating hit with 5.2 million fewer people getting employed. Physical distancing and reduction in business operations acted as barriers preventing people from visiting different countries which directly affected the tourism industry in Europe, forcing it to remain on standstill mode. The chain of events led to the majority of industries in Europe shutting down temporarily due to vast supply shortages coupled with the death rate spiking up to a record break of 11.6 per 1000 persons, resulting in the EU real GDP to spiral down by 6.1%. Millions of people seemed to be in a state of despair but the ECB rebounded with a prompt and powerful response which prevented the strenuous situation from inflicting any harm to the households’ accounting records. The widespread implementation of fiscal policy measures such as deterioration of public finances, reducing the working hours to put emphasis on temporary employment and granting of personal loans have helped to adapt to the disturbance caused by the novel pandemic. The European recovery fund granted to enterprises, micro companies and startups have helped stimulate the economy with workers getting back to work and producing goods to raise the revenue. With these expansionary relaxed fiscal policy, the economy of Europe has been able to come out with a positive outcome from the shocks of the pandemic and has seen growth from where it was positioned earlier. While the government deficit has soared to 10.1% of the GDP in 2020, the ECB has acted decisively by keeping interest rates low in order to mitigate the risks of the rapid expansion. The low interest rates will encourage the households to take loans and borrow from the bank. As the banks will earn revenue and will be in a profitable state, the government will find it easier to get rid of its debt in the long term from organisations or countries it had borrowed from. The ECB, very expeditiously, has flipped the arduous and vulnerable state of the economy into a much more prosperous and thriving state post the pandemic era. 

The adequate measures taken by the ECB lead to the economy slowly but steadily revamping in terms of employment and income levels of the households and consumers. Nevertheless, the thriving, flourishing and expanding economy was very short lived as the Russian – Ukraine crisis bombarded the European economy

like missiles, plunging it into a state of despondency as the citizens realised that they had been retracted back to square one. Putin’s sudden rage and aggression has displaced innumerous people from their households and the Ukranians have entered the EU regions as refugees in order to guarantee protection and access to basic necessities. While the EU countries have welcomed the refugees, two million people entering the borders has definitely put pressure on the allocation of natural resources and effective use of the raw materials available. The ban of imports of commodities such as oil, food, energy etc and the exclusion of Russia banks from the SWIFT has made the financing of trade for the Russian firms very gruelling and this has led to affect the economy of European Union countries due to restrictions in Russian exports. 

Europe is Russia’s biggest energy customer and it would be problematic to strip off that supply so easily. Natural gas and crude oil provides 25% of the energy in Europe, making it largely energy dependent and Russia halting this supply will lead to the industries and businesses operations to slacken. The economy declining at this moment seems absolutely infeasible because it would make it impossible for Europe to feed its own citizens as well as the bloated population due to the refugees. The excessive aggregate demand and shortage in supply has led to a surge in food, energy and commodity prices, escalating the cost of living and raising the inflation rate to 3%. The ECB had its hand tied to bring changes to the monetary policies as raising the interest rates would cease the recovery from the pandemic and its revenue to diminish make it exhausting for it to clear its debt. The global confidence of the economy has massively decelerated because the consumers are taking precautionary measures to save money and lower their spending due to fall in the purchasing power. The restriction in consumer expenditure has dwindled the profits for the ECB and the EU region but more importantly, the uncertainty has led to the financial market participants increasing the risk premium, demanding higher money for lending and this has led Europe to get turmoil and wrapped in a financial crisis. 

The growing uncertainty has caused the ECB to take momentous steps such as unwinding its asset purchases and accelerating its withdrawal from the bond market. Bonds are generally issued by the government when they want to raise money for financing their expenditure and they have to return the value with interest applied on it back to the issuer after a certain time period, depending on the agreement. The ECB raised the issuing of bonds after the pandemic to attract investors so that they could increase their public expenditure in order to maintain long term interest rates low and bolster the economy towards the growth path. However, the unanticipated Russian Ukraine war increased uncertainty and so the ECB was forced to hasten the exit from bond purchases so that the aggregate demand could fall and the hike in

inflation could be brought down to ECB’s target of 2%. While some of the economists were pleased by this decision, others felt that the ECB should first have tried to alter the interest rates and in case it saw no progress, it could have planned on taking a decision on the asset purchases and withdrawal of bonds. This is because they felt that if the ECB wanted to restart its asset purchases in the future, it would be extremely challenging which is unlikely for interest rates since it can be monitored with ease depending on situations and can be changed swiftly. Although there will always be mixed reviews on such key developments, Christine Lagarde seems to be content with the changes and she expects the inflation to drop down to 2.1% in 2023 and 1.9% in 2024 which will result in much more stability, both economically and financially, as compared to now.