EIB headquarters in the Kirchberg region of Luxembourg

Photo Provider: EIB Photo Library | LW Archive

According to the European Investment Bank, Russia’s attack on Ukraine has little impact on Luxembourg companies and is likely to affect the poor, even if it is helping Europe recover from a pandemic.

Rising inflation caused by the turmoil of the war could drive more Europeans into poverty, but the risk is the lowest among EU countries in Luxembourg, Austria, Malta and Cyprus, The economic model of the EIB as a base suggests.

Despite the economic impact of the war on rising energy and food prices, the proportion of the population at risk of poverty is higher in Luxembourg than in France, the Netherlands and the Czech Republic, Germany, the EIB report said. According to the report, the Grand Duchy is less susceptible to inflation, thanks to increased household savings and income, a factor shared by the richer countries of Northern and Western Europe.

“In the current crisis, we need to develop policies to mitigate the risks of vulnerable households and maintain social inclusion,” a multilateral lender said in a statement.

EIB simulations also show that the share of companies losing money across the European Union could increase from 8% to 15% in a year. According to the report, the percentage of companies at risk of default could rise from 10% to 17% over the same period. According to the EIB, chemistry, pharmaceuticals, transportation, food and agriculture are the hardest areas.

EIB forecasts that export-oriented companies in Luxembourg will not be affected at all, but the increase in energy companies in countries reporting losses will be modest. Luxembourg companies faced the lowest level of risk in the EU. According to the EIB, only Finnish, Danish, Malta and Cyprus companies were predicted to have low or no risk of loss.

Companies in countries close to Ukraine and Russia, such as Hungary, Poland, Latvia and Lithuania, are more exposed, and companies in Greece, Croatia and Spain are expected to suffer more than the EU average.

According to the EIB, the impact on banks should remain subdued. This is because, with a few examples, the European banking system is rarely directly exposed to Ukraine, Russia and Belarus. However, according to a Luxembourg-based bank, access to external sources of funding for businesses can be tight.

After the start of the war, the Luxembourg Ministry of Finance and the CSSF, a financial regulator, said the exposure of the country’s financial system to Russian sanctions was relatively small and well managed.

Funding from EU post-pandemic recovery and resilient facilities will be raised by promising repayments to all member states, giving the government room to deal with rising energy prices and rising military spending. The EIB said the tax revenue was planned in light of the decline in economic activity.

The EIB expects European Union economic growth to fall below 3% in 2022. This is down from the 4% growth this year estimated by the European Commission before the invasion of Russia in February.

“A recession is possible, and further trade turmoil and increased sanctions will increase the risk to the European economy,” the EIB said.

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