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The world has been hit by two destabilizing shocks in quick succession. The COVID-19 pandemic induced the sharpest peacetime recession in the European Union in 2020, reversing recent progress in rising living standards and leaving deep economic scars among the vulnerable populations. The economic recovery was robust, with most of the EU member economies recovering to pre-pandemic levels in 2021. After contracting by 5.9 percent in 2020, EU27 economic growth surged to 5.3 percent in 2021, its strongest post-recession recovery to date.

However, the rebound from the pandemic has been disrupted by the war in Ukraine that begun in February 2022 and which has led to an unprecedented humanitarian crisis.

The economic spillovers of the war along with the accompanying uncertainty risks stalling the recovery in the EU. The war has resulted in economic consequences that are being felt around the globe, and in Europe. Already prior to Russia’s invasion of Ukraine, the pace of recovery in the EU was tempered by COVID-19 flare-ups and low vaccine uptake in some member states, as well as the phasing-out of policy support and persistent supply disruptions. More recently, countries globally have also been impacted by the war in Ukraine and sanctions, extended lockdowns in China, and monetary policy tightening across several countries, especially the United States. The repercussions include disrupted commodity and goods trade, rising commodity prices, impacts on financial flows and remittances, and higher uncertainty. The impact for EU countries is amplified by the strong economic and migration links with Russia and Ukraine.

The economic downturn and the rise in energy and food prices will affect everyone, but the poorest households will be hit the hardest. Growing consumer prices have eroded real wages and may stymie labor supply and reduce standards of living. With food and energy prices 6 and 30 percent higher in 2022 than in 2020 respectively, the proportion of households facing energy and food insecurity—and risk of poverty—is likely to rise.

Going forward, EU member states face considerable headwinds from a multitude of factors. Heightened uncertainty as a result of the war is likely to dampen investment and consumer sentiment. Inflation continues to rise, with higher likelihood of further tightening of monetary policy in many EU member states, with implications for growth.

Getting the policy mix to support growth, tame inflation and support those in need while maintaining fiscal sustainability will be a tough balancing act, particularly considering the uncertainty ahead. With some signs of tightening of the labor market, protecting employment and increasing job creation in the coming quarters requires policies in three main areas. First, epidemiological vigilance and vaccination campaigns need to continue in order to avoid new lockdowns and dislocation of labor markets. Second, job-training and job-intermediation policies need to be accelerated to provide workers with the skills needed to transition to green jobs. Third, retraining policies for workers that may be affected by the ongoing digitalization need to be strengthened. These policies would not only render benefits in the short and medium term by creating jobs, but also make jobs more resilient to foreseeable changes in the labor market.

Last Updated: Dec 21, 2022

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