Authors: Anna Bjerde and Auguste Kouame*

The alarm bells ring every day: staggering heatwaves in the Antarctic, the coldest place on the planet; life-threatening and crop-destroying heat in India; deadly cyclones and drought emergencies in Africa; severe snowstorms in northern Europe and the United States; and apocalyptic sandstorms in the Middle East.

Here in Türkiye, Istanbul has been lashed by severe snow and wind storms this winter. And, last year, floods killed over 80 people and destroyed hundreds of homes, bridges, and other infrastructure in the Black Sea region. Wildfires, the worst ever in the country, scorched coastal forestland eight times the annual average, killing people and forcing evacuations. An outbreak of sea mucilage (or sea saliva), caused by rising water temperatures and believed to be the biggest in history, damaged the fishing industry and threatened vital shipping lanes. In 2021, Türkiye suffered 107 floods, 66 forest fires, 16 snowstorms and 39 landslides, according to the Disaster and Emergency Management Authority (AFAD).

These natural disasters are sober reminders that climate change is a global emergency, requiring urgent action at both national and global levels to combat its mounting threat to people here in Türkiye and around the world.

We are heartened by Türkiye’s strong signal last year to join the global community to protect people and planet. The ratification of the Paris Agreement on Climate Change by Türkiye and its pledge to eliminate carbon emissions by 2053 are a welcome commitment to accelerate action at the national and local level to fight off a global threat. We look forward to details of Türkiye’s commitment to adopt more ambitious  plans to reduce the harmful emissions that cause climate change and adapt to a more resilient and greener future.

At the World Bank Group, we hear the alarm bells and have galvanized into action to support Türkiye and other developing countries to implement strong measures, as detailed in our Climate Change Action Plan. To build a strong analytical base to guide our work, we have launched a pioneering series of country specific reports that are the first to explore the linkages between climate and development to identify priority actions to reduce carbon emissions and build resilience, while supporting economic growth and poverty reduction. The very first of the Country Climate and Development Reports (CCDRs) covers Türkiye, with many others on the way.

The Türkiye CCDR delves deeply into the country’s unique opportunities and trade-offs for aligning its development goals with its recent commitments on climate change. While the whole report is a valuable resource, we think a crucial element is the inclusion of an illustrative strategy that combines mitigation, adaptation, and resilience, and takes into account feasibility, social and people dimensions, costs, and benefits. The strategy prioritizes supporting adaptation in the private sector and ways to enhance the resilience of critical public assets and services, agriculture systems and land use, as well as financial resilience. Such a pathway for Türkiye involves a deep decarbonization of the power sector, energy efficiency and electrification in buildings and transportation, as well as reduction of carbon emissions in industry and agriculture. These are among major changes Türkiye needs to make to reverse course as the world’s 17th largest carbon emitter and to achieve its pledge of carbon neutrality by 2053.

These actions, to boost economy-wide climate resilience and eliminate harmful emissions, will require large investments – an estimated $165 billion until 2040. We estimate that the private sector will pick up half of the cost. And these additional investments are minimal relative to the size of the Turkish economy. But the benefits they can generate are huge – $146 billion in net savings by 2040, according to our calculations. The benefits would come largely from reductions in fuel imports and health benefits from reduced air pollution and contribute to energy security and lower energy expenditures.

Such a major transition will not be easy, especially for the very people that Türkiye needs to protect. Although new ‘green’ jobs will be created, workers in multiple sectors are likely to be impacted by decarbonization, including steel, cement, aluminum, coal, manufacturing, textile, and agri-food. That is why a “Just Transition” program should be an integral part of our work on climate change. For example, this program would support workers and communities that may be adversely affected by the green transition through vocational training geared towards market needs. It would also incentivize entrepreneurship capabilities and adoption of greener technologies and practices by small and medium enterprises as well as promotes inclusive finance and participation by women and youth in the economy.

With the war in Ukraine raging at Türkiye’s doorstep and the ongoing global pandemic, there is a risk that climate change will be sidelined by other pressing needs. But inaction is no longer an option – lives and livelihoods are at stake. Extraordinary times require extraordinary effort – a massive, global effort that will silence the climate alarm bells.

In Türkiye, the World Bank looks forward to continuing engaging with a broad set of stakeholders who need to be part of the country’s green transition, and we stand ready with financing, technical expertise and evidence-based research and analytics in expanding our support to help Türkiye’s people achieve a more resilient and sustainable economy and future.

*Auguste Kouame is the World Bank’s Country Director for Türkiye

Originally published in Turkish in Dünya Gazetesi/ World Bank

Russian-Chinese Economic Cooperation: Opportunities and Obstacles in the New Conditions

Global Warming And The Future Of Food

Indonesia’s Opportunities and Challenges in Facing the World Food Crisis

Why African Leaders Complain of Wheat Imports and Yet Ignore Zelensky

Looking for safety in security studies: Is it relevant to discuss climate change’s impact on UNSC?

China and the Middle East: Heading into Choppy Waters

Can Europe Afford for Turkey Not to Be in NATO?

The large-scale sanctions that have been slapped on Russia by the “collective West” naturally raised the question of its deepening and expanding economic relations with China. According to a number of parameters, Russia has no alternatives to cooperation with the PRC, or at least these are the most optimal. Such cooperation can be supported by the unprecedentedly high level of political relations, their already established economic partnership, Russia’s objective need for Chinese goods and technologies, and China’s reciprocal interest in Russia’s free market. The growing rivalry between China and the United States is also playing a role. At the same time, Russia should be prepared for the fact that the process of economic convergence will be difficult. The risk of secondary US sanctions against Chinese companies should be taken very seriously. China is highly integrated with the global economy. The risk of losing markets in the US, the EU or other countries as a result of restrictive measures is a serious factor, evoking caution among Chinese business in their relations with Russia.

Moscow’s need for deepening Russian-Chinese economic relations after February 24, 2022 is determined by the following tasks:

First, Russia needs to replace Western imports in its market, the supply of which has stopped due to foreign trade sanctions or informal boycotts. This is especially true of hi-tech goods and industrial equipment. They include electronics, equipment for oil refining, various types of machine tools, machines and parts for them. Chinese industry is the most diversified among the countries which remain friendly to Russia and can potentially be a source of such supplies, and in the long term, a base for creating more complex value chains.

Second, Russia needs markets for its exports, which are being consistently squeezed out of the EU, the US and other countries. Among the key items are oil, coal, ferrous metallurgy products, and over the long term—gas and other goods. Although China is unlikely to take over the entire volume of released exports, its market will play a key role.

Third, Russia needs an efficient mechanism for conducting financial transactions with foreign partners. The minimum task is to build reliable financial mechanisms for bilateral trade. A more complex task is the use of the renminbi for transactions with third countries. Both tasks are difficult to accomplish, but vital for partnership with China amid the new conditions.

China may be interested in developing relations with Russia due to the following conditions:

First, the sanctions free up significant market niches in the Russian market. Previously, they were difficult to occupy due to Russia’s well-established ties with Western partners. Today, there is an immediate liberation of the Russian market due to formal sanctions and informal corporate boycotts. Of course, the Russian market is incomparable with the US and EU markets. It will shrink due to the inevitable economic downturn caused by extreme economic pressures. However, even amid such conditions, the domestic market provides new opportunities for Chinese companies.

Second, China has the opportunity to obtain significant volumes of Russian raw materials at a discount. Russia will play an important role in diversifying the sources of raw materials for the Chinese economy.

Third, China can gradually strengthen its role as a major international financial centre. If the renminbi becomes the key currency of international transactions for Russia, this role of China will inevitably grow.

There are several factors that will contribute to the development of Russian-Chinese cooperation.

First of all, the already-accumulated volume of trade and economic relations should be noted. They form a solid base for further growth. The political climate is also important. If in relations with the EU and other Western players, mutually beneficial trade in the past decade and a half has been increasingly under pressure from political factors, then in relations with China, political conditions have been improving all these years. By themselves, they do not guarantee a breakthrough in the trade and economic sphere. However, they are a solid foundation for their development. Ultimately, it was politics that became the main reason for the collapse of relations between Russia and the West in the field of economics and trade. The broader context of Russian-Chinese relations also plays a role. American rhetoric against the PRC was scaled down since Donald Trump left office. However, the political and economic contradictions between China and the United States have not gone away. Beijing and Washington are strategic rivals. The crisis in relations between Russia and the West provides China with an opportunity to strengthen its position through a deeper partnership with Russia. The decline of the Russian economy is not beneficial to China.

There are also a number of difficulties. The first is related to the ongoing COVID-19 pandemic. China has experienced a new wave of the pandemic. The PRC authorities are forced to maintain a high level of restrictions, associated with business contacts. Sooner or later, the epidemic will cease to be a deterrent, but it prevents the immediate development of cooperation, which requires extensive human contact.

The second difficulty is more significant. Chinese businesses are afraid of secondary sanctions, as well as administrative and criminal prosecution by the US authorities if they violate the US sanctions regime, as well as the restrictive measures of other countries. Such a situation may arise, for example, in the case of mutual settlements between Chinese companies and Russian counterparties under sanctions in US dollars or even euros. Another scenario is the supply to Russia of goods that are produced in China under an American license and at the same time fall under US export control (for example, electronics). The resonant criminal and administrative prosecution by the US authorities of the Chinese company ZTE apparently had a serious psychological impact on Chinese business. The United States accused ZTE of supplying equipment with American components to Iran without permission and bypassing the US export control regime. As a result, ZTE pledged to pay more than $1 billion in fines to several US government agencies. The US authorities’ attempt to prosecute HUAWEI CFO Meng Wanzhou had a similar effect.

We can talk about the same effect in connection with the blocking sanctions of the US Treasury against the Chinese company COSCO SHIPPING Tanker for the alleged transportation of Iranian oil (however, the company was able to quickly have the sanctions lifted administratively). The risks of secondary sanctions and coercive measures are forcing Chinese businesses to carefully evaluate options when considering cooperation with Russia. A particularly thorough analysis is being carried out by companies that are actively working in the US and EU markets.

At the same time, secondary sanctions and coercive measures alone are unlikely to stop the growth of trade relations between Russia and China amid the new conditions. The export control of foreign countries does not apply to those goods that China produces using its own technology, and there are more and more products like this. Financial sanctions are unlikely to affect Russian and Chinese businesses in the event of transactions being conducted in renminbi outside the contours of the American financial system. That is, trading in national currencies will mitigate their impact. The Chinese authorities are actively modernising their legislation aimed at protecting Chinese firms from Western sanctions. There is no doubt that the risk of secondary sanctions and enforcement measures will be significant in the medium term. Russian business should be sympathetic to the caution of their Chinese partners. At the same time, operational work on financial mechanisms for mutual settlements and the development of market niches not related to Western technologies will provide more opportunities in the long term.

An important fundamental factor for further cooperation is knowledge of the Chinese language, culture and law. The lack of such competencies will prevent Russian businesses from seeking markets in China, attracting Chinese investments and suppliers, or conducting effective negotiations. Chinese businessmen in Russia, for their part, are quickly mastering the Russian language. The development of cultural competencies, at first glance, is secondary in comparison with financial infrastructure, transport corridors and other conditions. However, without them it will be difficult to count on the full development of our relations for decades to come.

– Yesterday, the World Bank approved a new Development Policy Loan for Ukraine with a significant sum, $1.5 billion. How fast these money will come to Ukraine and what are the priorities of this loan? 

– The loan approved on 7 June – the Public Expenditures for Administrative Capacity Endurance in Ukraine (or PEACE in Ukraine) – is not a Development Policy Loan, but one that finances core government expenditures so that the government can continue to operate and provide services to the people of Ukraine. In its current version, the World Bank undertakes to reimburse the government for all salaries of core civil servants as well as salaries of educators every month (beginning in March, after the war began, until at least the end of the year), so long as the salaries are actually paid in full. So, after an initial big reimbursement for the March-May period, the remaining amount will be paid month-by-month on the basis of proof of actual expenditures. All of this will help Ukraine preserve and protect the capacity of the government and help in ensuring that this strong government capacity is preserved for economic recovery. 

– What types of financial assistance can Ukraine expect from the World Bank Group in 2022 and 2023? What additional amount can be received through the Bank’s Trust Fund? Could the Bank participate in covering Ukraine’s sectoral deficits, for example, in the electricity and gas sectors?

– Given the acute financing needs for the central budget, The World Bank is now concentrating on helping provide fast and immediate assistance – which in turn can help the population, especially the most vulnerable. First, very soon we will disburse a further $100 mln to help internally displaced people. We are continuing, within our existing projects, to help in the health sector, infrastructure and energy. We are also exploring with other bilateral development partners (such as Italy, Japan and the United States), who are very interested in adding to the PEACE loan and financing other types of verifiable budget expenditures; the specific items are not yet agreed, but will certainly include additional payments to internally displaced persons and other vulnerable groups in Ukraine. Our sister organization, IFC, who works with the private sector, is helping with guarantees to promote trade and agriculture. 

– On what conditions, in your opinion, should financial assistance be provided to Ukraine during the war and after it, for the reconstruction of the country? How strict should they be? How to avoid the formation of Ukraine’s debt overhang, because according to the World Bank forecast only this year its debt will increase from 50.7% of GDP to 90.7% of GDP?

– Ukraine right now needs enormous resources every month to keep the economy functioning during the war – the government’s estimate, which we broadly endorse, is around $5 billion a month (or $35 bn from now until the end of 2022). Clearly, getting sufficient resources is the most important challenge – but the cost of these resources also matters, exactly because Ukraine will need to service these increasing debts in the future. 

So the best way for partners to support Ukraine is through grants – which is most prominently being done by the US. Since grants of sufficient magnitude are not easily available, the next best option are loans that are quite concessional, with low interest rates and longer maturities – such as from the World Bank and other IFIs. Some countries, such as the UK, Netherlands, Sweden, Lithuania, Latvia and Denmark, have innovatively helped increase the volume of such cheap loans to Ukraine, by issuing guarantees to the World Bank and other IFIs. 

– In early April, the WB forecasted a decline in Ukraine’s economy this year by 45,1% with inflation of 15% and its recovery in 2023 year by only 2,1%. How much has this forecast changed as of now?

– Our 2022 GDP projection is still unchanged (authorities currently have 44 percent GDP decline in 2022). But our estimate of the medium-term recovery is now at risk due to the prolonged war, with active combat still continuing in parts of Ukraine. So the impact on the GDP is coming from the relatively large area with active war, while the remaining part of Ukraine is suffering from shelling with corresponding damage to infrastructure, assets and thus livelihoods and jobs. And unfortunately, the probability that the war can last beyond 2022 is now higher. 

There is another risk to the broader economy. Inflation pressures are growing – due to the need to cover some part of fiscal needs during March- May via Central Bank monetization and financing from domestic banks and depreciation expectations, together with decreased supply of essential goods. Thus, inflation is now expected to increase further – and can reach 20 percent in December (vs 15 percent in our April projections). 

International partners have recognized the fiscal challenges and have already committed around $20 bn of financing to help Ukraine. Despite these significant commitments, the timing of its disbursement will remain critical in order to address Ukraine’s ongoing needs.  

– What is the current World Bank’s assessment of Ukraine’s losses from the war? How fast can the economy of Ukraine and the level of poverty of its population return to the pre-war level? Under what conditions?

– At the end of March, we estimated damages to infrastructure and structures to be around $60 bn, which was close to the estimates being provided on a continuing basis by the Kyiv School of Economics, which is using World Bank methodology. By now, the direct physical damages are well over $100 bn. If you additionally account for the economic losses that companies and individuals have undergone because of the war, the damages rise to two or three times that amount. Together with the government of Ukraine and the European Union, the World Bank will come up with a broader “Damage and Needs Assessment” by late summer.

Catching up to pre-war levels of the economy will not, unfortunately, be quick or easy. Ukraine will need rapid economic growth – far higher than the average of 3 percent a year that we saw in the pre-war era. A simple way to think about this is the “rule of 70” – the number of years it takes a country to double its GDP is 70 divided by the rate of growth. So at 3% growth, Ukraine would take 22 years to double its economy. But if Ukraine can achieve a consistent 7% growth, it will need just 10 years.

– In your opinion, what economic steps would help Ukraine better adapt to the war-caused situation? For example, should the state increase or decrease its expenditures? Should tariffs be fixed or subsidies increased?

– To achieve the sort of growth rate needed for recovery, Ukraine will need to reinvent its economy to one that is led by a dynamic, competitive private sector and an EU orientation. It will need to take measures – on investment climate, rule of law, justice and logistics infrastructure – to attract large amounts of foreign private capital and technical expertise. The model here is what Western Europe was able to do after World War II with the help of the Marshall Plan – where modernizing their economies was as or more important than the large grants from the US.

So the state expenditures will play a big part – for essential infrastructure, for essential services, for education and health, for social protection, and of course for defense and security. Because of this, the state will also need to collect sufficient revenues to do all this. But public spending by itself will not be enough for recovery and growth – a major role for the state will be to set the conditions (that go much beyond tax rebates or special subsidies) to help all Ukraine’s competitive private sector flourish. 

– What are your suggestions for the current Ukraine’s social safety nets sector? Does it worth for Ukraine to establish Universal Basic Income system? How should the government build its financial relations with refugees, who left the country?

– Ukraine’s social safety net system, including pensions and the Guaranteed Minimum Income program – as well as the new benefit program to support internally displaced persons (IDPs) – provides important financial protection to the population during the economic disruption caused by the war. The system will soon come under pressure, though – a pressure that will worsen the longer the war endures. Our own estimates show that the household losses from the income shock and higher cost-of-living will be around 25 percent of the household budget. Poverty, under the worst-case scenario, may reach as high as 58 percent in 2023. This will push millions more people onto social assistance. 

Although the government budget is under fiscal strain, sweeping social expenditure cuts should be avoided since they would have catastrophic consequences for beneficiaries of these social safety net programs. This is why the Bank has been supporting, and will continue to support, the Guaranteed Minimum Income program (including through a new $50 million disbursement). As I mentioned earlier, the World Bank will also provide nearly $100 million in reallocated lending to support the IDP program during the period of martial law. The government is also to be commended for its impressive leveraging of the existing digital Diya platform to allow new cash transfers to be paid to IDPs within just eight days, reaching 3.5 million beneficiaries within a month. 

– What wartime solutions for the medical sector, education and science does the World Bank offer?

– The war is having a devastating impact on health and education in Ukraine and is expected to affect generations to come.The most obvious effects on health are immediate, in the form of thousands of conflict-related deaths and injuries. Less visible is the illness caused, and worsened, by people not being able to access care for acute and chronic conditions. In education, due to the combination of COVID-related and war-related school closures, Ukrainian children have been out of school for more than a year. This will imply huge learning losses, whose consequences will impact future employment and income, with estimated future earnings losses of more than 10 percent per year per student.

While the war still rages, the health system will need to focus on meeting emergency medical needs related to war-related injuries, but also ensure continuation of other essential health services, including for COVID, and for chronic conditions (like hypertension and diabetes), so that long-term population health is not jeopardized. This is why World Bank projects are continuing to support both the procurement of emergency medical equipment and also the financing of the Program of Medical Guarantees. Expansion of services to address the mental health impact of the war is also needed. While providing education during war is difficult, a very promising approach it to use on-line, phone-based, or in-person tutoring can happen anywhere and is both effective and cost-effective. Tutoring could be an important complementary to the classes provided by the All-Ukrainian Online School platform.  Through payments through the PEACE project to cover a share of teachers’ salaries, the World Bank is helping to ensure continuity of education for all Ukrainian students, no matter where they are located. 

– The concept of “RebuildUkraine” was recently presented. It stipulates that while the reconstruction plan must be framed by Ukraine itself, its implementation should be led through the “Ukraine Reconstruction Platform”. In Ukraine, there is a discussion about the effectiveness of this format: they say that a significant part of the funds will go to the bureaucracy instead of financing real projects. Could the “RebuildUkraine” concept be effective? How centralized should the funding process be? What role will the World Bank play?

– Ukraine’s reconstruction, as mentioned earlier, will need efforts from everyone – Ukrainian authorities (and yes, the bureaucracy), Ukrainian farmers, entrepreneurs, those in digital tech industry, heavy industry, banking, retail … 

Key to this process is for the state to provide the essential expenditures and framework for recovery – in terms of basic services, protection of the population, proper regulation and competition policy (that is not too onerous and not too light), security and justice. Improving services and rebuilding institutions not cheap, and it will require significant resources for the state. A lot of that will come from abroad – especially if Ukraine commits itself to build institutions as good as those in the EU to prepare for accession. However, the state also has to enable the private sector to be able to flourish – and that means not just the big industrialists, but also the average Ukrainian farmer or small businessperson. And for this, what will be needed is not just money, but expertise, regulations that are fair and easy to navigate, and attention to ensuring that everyone has equal opportunity to succeed.

The World Bank will play a strong role in helping the Ukrainian authorities in achieving this vision –through our own finances, but also through coordinating with other development partners so that we can all complement each other to get the most resources to the best uses in Ukraine (as we are already doing today for the period of wartime relief). But as important will be our global expertise across all economic sectors, which we hope to share with and work hand-in-hand with Ukrainian authorities to help rebuild the Ukraine of the future.  

– The World Bank has repeatedly claimed the risks of deepening poverty and hunger in many low-income countries due to the war in Ukraine. What is the World Bank Group doing to unblock food exports from Ukraine?

– The cheapest and fastest way to get grain and oilseeds out of Ukraine is through the Black Sea. This needs work in the diplomatic and political areas to unblock these routes. While these are not our area of expertise, we encourage and support these efforts. Meanwhile, we are working to enhance the overland exports of grain, by working with Ukrainian railways and the European Union on how to increase the flow of grain exports through EU countries. Since this will not be able to get all the grain out, IFC and we are also working to see whether we can help farmers obtain better forms of temporary storage for the grain so that it does not spoil before it can get exported or consumed.

First published in Interfax-Ukraine- World Bank

As the European bond market falls, European Central Bank (ECB) President Christine Lagarde said on June 28 that the central bank will start a bond-buying program on Friday to curb possible debt crises. The ECB is considering maintaining “flexibility” in its reinvestment allocation to its massive EUR 1.7 trillion bond-buying portfolio while launching a new program to stabilize the markets. It is also working on a new bond-buying tool to address so-called “fragmentation”. Lagarde said the tool would allow rates to rise “as far as necessary” to complement stabilizing inflation at the 2% target. The ECB’s position as the “buyer of last resort” has eased the sell-off of European bonds to a certain extent, and the yields of sovereign bonds of some highly leveraged countries have fallen.

Under the ECB’s decision to raise interest rates in July to counter inflation, its proposed bond-buying program, while easing a possible bond market crisis, is effectively contradicting its imminent monetary tightening. Researchers at ANBOUND pointed out that similar to those implemented by the Federal Reserve and the Bank of Japan (BOJ), the ECB’s monetary policy also faces challenges ahead. With high global inflation narrowing down the monetary policy space, the dilemma between inflation and employment is becoming increasingly more common. This is not good news for the global economy and capital markets, as the contradiction between economic growth and inflation will plague major central banks for a long time.

Lagarde said the ECB would remain “flexible” on reinvestment of the PEPP portfolio due on July 1. “We will ensure that the orderly transmission of our policy stance throughout the euro area is preserved,” she said. “We will address every obstacle that may pose a threat to our price-stability mandate”.

The ECB’s insistence on playing the role of the “buyer of last resort” has actually drawn lessons from the European sovereign debt crisis triggered by the 2008 financial crisis. Due to the slow decision-making of the ECB at that time and its reluctance to promote easing, the economies and financial systems of highly leveraged countries such as Greece, Italy, and Spain suffered huge losses from the debt crisis. ECB then finally launched quantitative easing in 2014 to deal with the dual threats of deflation and the sovereign debt crisis at that time, which stabilized the economic and financial systems of the relevant countries. In total, the ECB currently buys more than EUR 49 trillion of bonds, equivalent to more than one-third of the eurozone’s GDP. In the past two years, the ECB has bought more bonds than all the additional bonds issued by the 19 eurozone national governments, giving it huge leverage over the region’s borrowing costs.

As the European market is about to bid farewell to negative interest rates, after the ECB starts hiking interest rates, the increase in borrowing costs will inevitably bring new risk factors to its bond market. The consequences of rising interest rates will not only cause the economic growth of various countries facing decline, it is also likely to lead to a new round of debt defaults. Such is the price that the central bank has to pay for its measures against inflation. However, as with the Fed, market investors are equally skeptical that the ECB’s tightening policy will be effective in tackling inflation. At present, the inflation level in the eurozone has reached more than 8%, which is more than four times the 2% target of the ECB. The latest CPI data in the eurozone in June is expected to reach a record high of 8.5%. High inflation is not only the energy distortion brought about by the conflict between Russia and Ukraine, but also the constraints of supply chain adjustment.

These factors mean that the inflation level will be difficult to contain in the short term and will fall back quickly. ECB Chief Economist Philip Lane said the central bank must remain vigilant in the coming months as inflation could keep climbing and the region’s economy could slow due to consumption. Meanwhile, Morgan Stanley stated that the eurozone’s economy is expected to slip into a mild recession in the fourth quarter of this year as measures of consumer and business confidence slump due to reduced energy supplies in Russia, while inflation remains high. The eurozone’s economy is expected to contract for two quarters before returning to growth in the second quarter of next year, driven by rising investment. Despite the risks of an economic slowdown, the ECB is still expected to raise rates at every meeting for the remainder of the year, culminating in a hike to 0.75% in December, given the persistently high inflation. However, if the economic outlook deteriorates significantly, the ECB may stop raising interest rates after September. This actually shows that the central bank does not have many effective means in the face of high inflation. It can only adopt the take-one-step-at-a-time approach and adjust between inflation and recession.

Such a situation is happening in the United States and Japan as well. The Fed is also faced with the conflicting choice of inflation and recession, while the BOJ needs to consider a series of effects of changing its easing policy. The situation in Japan is somewhat similar to that of the ECB in that it is difficult for the central bank to tighten its currency by shrinking its balance sheet. After the Japanese yen continued to depreciate, the inflation level exceeded the target of 2% for a row, putting the BOJ to be in a difficult position. If the easing policy advocated by Abenomics is terminated to deal with inflation, it will bring about an increase in the yield of Japanese government bonds, in addition to the collapse of the Japanese stock market bubble. With Japan as a whole facing an unprecedented level of leverage, it is not optimistic that Japanese companies can afford the increase in interest rates. At the same time, the BOJ has accumulated a large number of sovereign bonds and risk assets. Once the balance sheet is reduced and sold, it will intensify the sell-off in the capital market, thereby causing a capital market crisis affecting both stocks and debts. This crisis, especially the debt crisis, will cause fatal shock and impact on the economy.

This prospect is also the reason why the ECB is still struggling to stop bond-buying even if it is determined to raise interest rates. Relatively, because of the special role of the U.S. dollar in the international currency, the Fed does not encounter greater risks when it raises interest rates while shrinking its balance sheet, and rather it is in a relatively active position. However, the Fed also faces the risk of a recession caused by accelerated policy tightening. This is similar to the situation of the ECB and the BOJ. Balancing inflation and economic stagnation would be the main challenge faced by major economies, and it is also a dilemma that the main central banks in the world have to face.

Given the high level of global inflation, major central banks in the world tend to adopt tightening policies. However, the contradiction between inflation and economic growth, as well as the resulting debt problem, is becoming more and more prominent. Under these contradictions, central banks are generally facing the dilemma that while the space for monetary policy is narrowed, the policy difficulty has increased. This also means that these central banks are in the embarrassing situation of monetary policy failure, and that the global economy needs to deal with the threat of stagflation for a long time.

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