Yesterday (Tuesday), European Commission President Ursula von der Leyen announced the bloc’s sixth sanctions package against Russia following its invasion of Ukraine. At its centre is a ban on EU seaborne oil imports from Russia (some two-thirds of the total), which, together with further commitments to cut pipeline imports by Poland and Germany, will eliminate 90% of oil the EU imports from Russia. The package aims to deny Russia an increasingly large part of the €400bn euros of hard currency it receives yearly from the EU for its oil, which the bloc argues helps Russia sustain its war effort in Ukraine.

Yet it is now clear that Russia will not be the only one to suffer. The same day, the EU’s statistical office, Eurostat, released figures of 8.1% year-on-year inflation expectations for the Euro Area. The chief culprit is undoubtedly energy, which is expected to rise 39.2% year-on-year in May, and accounts for over half of the total HICP increase. This will only worsen as the EU moves to enforce the oil ban and presumably sets its sights on Russian gas, another major source of revenue for Putin’s regime and 40% of EU gas imports.

The situation on food is likewise not encouraging. Russia and Ukraine together produce over a quarter of globally traded wheat and almost three-quarters of sunflower oil. The destruction in Ukraine and sanctions on Russia caused by the war threatens to remove much of it from world markets, causing widespread shortages and rampant inflation. The protectionist response by world governments, such as India’s ban on wheat exports, or Argentina’s ban on soybean meal and oil, have only exacerbated the situation, hurting consumers’ purchasing power and slashing real incomes worldwide. Meanwhile, those on low and middle incomes, who are more likely to hold savings in cash, are worst affected.

EU decisionmakers possess a number of policy alternatives to tackle the issue, each with its own risks and benefits. Most widely-discussed are interest rate hikes by the European Central Bank (ECB). The ECB, which is responsible for the euro’s monetary policy, is already behind the US Federal Reserve on rate hikes and tapering (winding down the asset portfolio accumulated through quantitative easing). This is problematic because monetary policy changes typically have a time lag before affecting the economy as desired. Whereas the Fed operates a 0.75-1% target funds rate and is now effectively selling $47.5bn of assets per month, the ECB is still a net buyer under the Asset Purchasing Program (APP), and is only set to “exit negative interest rates” by September. Raising interest rates offers the benefit of anchoring inflation expectations and reaffirming the ECB’s commitment to a 2% target for inflation, instilling confidence in the economy. The risk, however, is depressing demand and triggering a European recession causing widespread unemployment and bankruptcies.

National governments, in charge of fiscal policy, are already looking to mitigate the worst effects on consumers through price controls, subsidies, and even handouts to those most in need. Hungary has recently extended price caps on food items like wheat, sugar, chicken, as well as on petrol, until July 1st, sparking an inflow of ‘gasoline tourists’ from Slovakia. Germany, meanwhile, has attempted to combat inflation by introducing a steeply-discounted €9 monthly public transport tickets, which, according to estimates from Berenberg, may temporarily reduce inflation by 0.4% YoY. These measures, as well as slashing excise taxes on gasoline, can help protect the most vulnerable consumers. Nevertheless, the decrease in revenue and rise in public spending stretches government budgets, while preventing business from passing on rising costs to consumers squeezes earnings, which can lead to layoffs and erode business confidence. Also, as some pointed out over the UK government’s £15 billion in May, injecting more money into the economy intensifies the process of consumers bidding up the prices of goods, contributing to inflation.

Finally, EU authorities will be looking to secure alternative energy sources. In the short-term, some hope that Saudi Arabia could supply more oil, while Qatar could be depended on for liquefied natural gas (LNG) after temporary relief shipments from US. But ramping up production takes time and may go against the interests of OPEC+. The US is reportedly looking at easing sanctions on Maduro’s Venezuela, unlocking additional oil supplies. In the mid-long term, Europe will look to replace its fossil-fuel dependency, which has now become not only environmentally, but geopolitically problematic, with renewable sources. Such investments, however, will cost both considerable time and capital. A temporary solution might be to delay the planned shutdown of nuclear power plants in Germany and Italy, in order to make up for lost fossil fuel supplies, but this has been mostly ruled out.

Since its inception, the European Union has had to toe a thin line between its political and economic identity. The reintroduction of an external security threat will test this conflicted self-definition more than ever. While EU members broadly agree on the need to support Ukraine and resist Russian aggression, the price they are willing to pay for this ideological commitment is varied. For Germany and the Baltics, a higher cost of living is an acceptable trade-off of slowing the Russian war machine. For Orban’s Hungary, meanwhile, this calculation is not so straightforward. Higher inflation and higher interest rates risk creating rifts in other ways too, such as through a renewed migrant crisis of economic refugees from Africa and the Middle East, or a revival of the 2012 debt crisis, as countries like Greece and Italy struggle with higher cost of borrowing. If the bloc does succeed in weathering the coming storm, however, it will emerge stronger and more resilient on the other side.