The cost of living crisis is at its heart an energy crisis engineered by Russia to weaken European unity and the values we support in Ukraine. It is, indeed, creating new social and regional challenges in Europe. But this only underlines the importance of EU investment in helping Europe’s poorer, more vulnerable regions and communities adapt to a changing world. The investments we make to deal with this immediate crisis must be geared to a long-term transition to a carbon-free, energy independent future.
The surge in energy and food prices ignited by Russia’s invasion could push as many as 11 million Europeans below the poverty line, according to our economists, whose annual Investment Report is released on 28 February. While the rising cost of living is driving living standards down for everyone in Europe, some groups are more exposed than others. Think of poorer, younger and less qualified households whose finances took a hit during the pandemic and tend to spend a higher portion of their income on food and energy. Countries with higher inflation and higher inequality, such as those in Central and Eastern Europe, particularly the Baltics, are likely to see the biggest increases in poverty.
The impact on different regions of Europe will depend on the structural make-up, resilience and adaptability of their economies, as well as their proximity to the war in Ukraine. That conflict places the greatest strain on those countries that are further east, have higher unemployment, and are most reliant on energy-intensive industries.
In the face of the challenges of a changing world, Europe’s greatest strength is its unity. But unity cannot be taken for granted. To preserve and strengthen it, the European Union must continue to invest in its cohesion.
The European Union’s cohesion policy— the policy of investing in its economically weaker regions to raise living standards—has always been the most visible expression of European solidarity and interdependence. It has served as a key driver for economic convergence and growth throughout Central and Eastern Europe, as well as being a powerful support in times of crisis. Cohesion policy was among the first tools deployed by the European Union to help contain the economic fallout of the COVID-19 pandemic. The Cohesion Action for Refugees in Europe programme has helped to counter some of the short-term fallout from the war in Ukraine.
Over the life of its current long-term budget, which runs from 2021 to 2027, the European Union plans to contribute €244 billion to support social and regional cohesion through the Cohesion Fund. In addition, out of the investments to be funded by the Recovery and Resilience Facility between 2021 and 2026, €193 billion has been earmarked for social and territorial cohesion. The countries of Central and Eastern Europe, which are most affected by the cost-of-living crisis, will be the biggest beneficiaries relative to GDP.
In 2021, the European Investment Bank adopted a bigger, bolder and more focused approach to cohesion. This will see the EU bank increase its support for Europe’s weaker regions, while at the same time ensuring that fully half of all our lending goes towards climate action and environmental sustainability.
Investment in climate action and environmental sustainability is especially important for less-developed cohesion regions and for those struggling with rising energy prices, whether to heat their homes, drive their cars, or power their businesses.
To address the challenges of cohesion regions and the energy crisis at the same time, we need to prioritise investments that serve both objectives. Investments in clean energy, clean transport and energy efficiency, for example, can boost regional economies, while reducing carbon emissions and strengthening Europe’s energy independence. I believe that investing in Europe’s cohesion by backing the green and digital transitions in its most affected regions will support less developed regions and all of Europe with a strategy to emerge stronger, greener and better prepared for the future.