01.06.2022
Parliamentary testimony: presentation of the Banco de España
Annual Report 2021*
Economic Affairs and Digital Transformation Committee
Pablo Hernández de Cos
Governor
*iEnglish translation to the original in Spanish
*
Mr Chairman, ladies and gentlemen:
I appear before this Committee to present the Annual Report 2021 of the Banco de España.
The report offers an analysis of recent developments in the Spanish economy within the
global setting, as well as how it is likely to perform in the future and the challenges it faces.
I should like to begin by describing how the Spanish economy performed and the role played
by economic policy in 2021. Next, I shall present the economic outlook following the new
shock triggered by the Russian invasion of Ukraine, before going on to describe the key
aspects of the sharp rise in inflation and outlining my thoughts about the role that economic
policy must play to meet the short-term challenges. I shall then discuss the main
mediumterm challenges and the recommendations that, in the Banco de España's view, it would be
desirable to implement, to tackle them. Lastly, I shall address the situation of the banking
system, by summarising the main messages from our latest Financial Stability Report,
published in April.
Performance of the Spanish economy in 2021
The recovery in activity that started in the summer of 2020 continued at the global level
during 2021. The headway made in the vaccination process allowed for a gradual easing of
social distancing measures and for a recovery in demand, underpinned by the powerful
economic policy response.
However, the recovery was partially hampered by three factors. The first of these factors
was the various waves of the pandemic, although the ensuing disruptions to economic
activity became progressively less severe. Conversely, the other two - namely the sharp
rises in the prices of certain goods and the global supply chain disruptions (bottlenecks) -
have gradually become increasingly important constraining factors. These have proven
more persistent and severe than expected and have become even more acute following the
outbreak of war in Ukraine and the measures adopted in China to counter the latest outbreak
of the pandemic.
Although these three factors are global in nature, their impact has been very asymmetrical
across countries, given the differences in productive systems, access to vaccines,
economic policy response and degree of energy dependence.
As a result, the recovery was particularly strong in the United States, where activity in 2021
H1 already exceeded its pre-pandemic levels. This higher buoyancy also led to inflationary
pressures emerging sooner and more forcefully. By contrast, the euro area did not return to
its pre-pandemic level of activity until late 2021. In 2022 Q1, GDP in the United States and
the euro area stood 2.8 and 0.5 percentage points (pp), respectively, above their 2019 Q4
levels. For their part, inflation rates in April 2022 stood at 8.3% and 7.4%, respectively, that
is, 6.9 pp and 6.5 pp higher than in early 2021. According to the earliest leading preliminary
data available for the euro area, corresponding to May, inflation has risen once again, to
8.1%.
Although the Spanish economy saw a gradual recovery over 2021, which extended to early
2022, this recovery is still incomplete and uneven by sector. In early 2021, the primary
conditioning factor was the epidemiological developments, as they required maintaining
measures to contain the disease. The swift headway made in the vaccination campaign
allowed a more buoyant phase to begin in Q2, but this was tempered from mid-2021 by the
bottlenecks and higher energy prices, which were compounded towards the end of the year
by the spread of the Omicron variant.
In the opening weeks of 2022, with this wave of the pandemic subsiding and the first timid
signs of relief in the bottlenecks, it appeared that the path to recovery was beginning to
clear once and for all. However, the Russian invasion of Ukraine in late February has
provided a further negative shock, which I shall refer to later in detail.
GDP growth stood at 5.1% in 2021 as a whole, which slowed to 0.3% quarter-on-quarter
in 2022 Q1. During this period there was an intense shift in the strength of activity, with the
hospitality and leisure sectors becoming more dynamic as headway was made in
vaccination. At the same time, disruptions in maritime transport, difficulties in the supply of
certain inputs and higher input prices affected the recovery in the primary, industrial
(particularly in the case of transport) and construction sectors from mid-2021.
By demand component, consumption recovered significantly, but not enough to return to
pre-pandemic levels.1 It therefore appears that households - particularly higher income ones
- still have a high volume of saving built up since the start of the pandemic. Turning to
housing, building permits reached levels similar to those seen prior to COVID-19. However,
the drastic fall-off in housing starts in 2020 Q2 and Q3 has continued to weigh down on
construction completion volumes in 2021 and 2022. For their part, house sales and
purchases surged. Private productive investment grew by 8.8%, driven by the intensification
of digitalisation and by firms having to adapt to the pandemic containment measures. To
date, the boost from the Next Generation EU (NGEU) programme has been modest.
Net external demand contributed nearly 0.5 pp to GDP growth in 2021. By component, at
end-2021 trade in goods stood at levels only slightly higher than a year earlier, due to the
impact of bottlenecks. By contrast, exports of tourism services recovered vigorously.2 It is
worth highlighting that the total number of exporters3 exceeded pre-pandemic levels by
5.5%. However, in 2021 the stable export base (firms that have been exporting for at least
four consecutive years) was still 1.4% down on two years earlier. Overall, lending capacity
recovered, to 1.9% of GDP in 2021, although the net debtor position vis-à-vis the rest of
the world remains high (70% of GDP at end-2021).
As regards the labour market, the recovery in employment was particularly vigorous. Thus,
in March 2022 effective social security registrations stood 2.1% above their pre-pandemic
level, albeit with notable cross-sector differences.4 In the public sector, employment was
around 10 pp higher than the pre-pandemic level, while in the private sector the difference
stands at approximately 1.5 pp.5 Nevertheless, total hours worked performed somewhat
less favourably, leading to a 4 pp gap at end-2021, although this gap narrowed significantly
in 2022 Q1, to 0.5 pp.
One discernible characteristic since the crisis began has been employment, measured in
numbers of persons, performing markedly better than GDP.6 Various explanations for this
have been offered, none of which are easily verifiable. These include the pandemic
restrictions (e.g. limitations on capacity) forcing firms to maintain a higher volume of
employment for a given level of activity; the public sector's greater hiring needs to deal with
the fallout from the health crisis; and employees returning from furlough in droves given the
expectations of a recovery in activity that subsequently did not fully materialise.
Following the initial decline when the pandemic broke out, a recovery in labour supply has
been observed recently, although the migratory flows of foreign nationals are recovering
considerably more slowly. The unemployment rate remains at similar levels to those of the
pre-pandemic period, as does the participation rate.
Turning to inflation, the rate of change in the harmonised index of consumer prices (HICP)
went from -0.6% in December 2020 to 9.8% in March 2022, its highest value since 1985.7
It then eased somewhat, to stand at 8.3% in April, owing to a slight slowdown in the energy
component (which had risen by 60% in March), and subsequently rebounded to 8.5% in
May, according to the leading indicator. Indeed, nearly two-thirds of the total increase in the
HIPC since the start of 2021 is attributable to higher energy prices. These, in turn, stem from
the sharp increase in hydrocarbon and electricity prices on international markets, but also
from a significantly stronger impact on retail electricity prices in Spain than in other
European countries. However, the growth rate of food, services and non-energy industrial
goods prices has also risen significantly. As a result, the underlying inflation indicator, which
excludes energy and food, rebounded to 3.4% in April.8
Overall, in 2022 Q1 GDP in Spain was 3.4 pp below the pre-pandemic level, while in the
euro area it stood 0.5 pp above its pre-crisis mark. These differences are smaller in the case
4
In particular, some services, such as hospitality and recreation and leisure, are still a long way off recovering their February 2020
employment levels. Conversely, employment is clearly above pre-crisis levels in information and communication activities and in
nonmarket sectors.
5
In terms of data from the Spanish Labour Force Survey (EPA, by the Spanish acronym), public sector employment was 6.6 pp higher
than its pre-crisis level, whereas private employment was 0.6 pp below.
6
The apparent discrepancy between the behaviour of activity and that of employment was particularly marked in some sectors. In
agriculture, industry and construction, effective social security registrations exceeded the pre-crisis level by 0.7 pp on average in 2022 Q1,
while their overall GVA remained 6 pp below that level. The divergence was particularly notable in construction: in 2022 Q1 employment
in this sector was 3.8 pp above its pre-crisis level, but GVA remained 12.9 pp below that mark.
7
In fact, the HICP series dates back to 1997. Consequently, for the period prior to that the comparison is made with respect to the
consumer price index.
8
For its part, year-on-year growth in the prices of services and non-energy processed goods, which include processed food, stood at
4.3% in May.
of employment.9 Among the factors behind this worse relative performance of the Spanish
economy is its specialisation in tourism.10 This sector has been among the hardest hit by
the pandemic and, moreover, the recovery in inbound tourism has been slower in Spain.
Indeed, the gap with the euro area has tended to narrow in the most recent period, given
the improvement in activity in hospitality and leisure. However, there was still a significant
gap in trade, transportation and hospitality; construction; and professional and
administrative activities; as well as in industry, in part due to the importance of the
automotive industry. Conversely, in the sectors that have led the recovery, such as financial
activities and public administration, GVA has outstripped its pre-pandemic level in Spain
more than in the euro area. From the standpoint of demand components, the difference
visà-vis the rest of the euro area reflects the lower buoyancy of services exports,11 residential
investment12 and private consumption.13
The role of economic policy in the pandemic crisis
Economic policies worldwide have played a key role to mitigate the impact of the health
crisis on the income and financial position of households, firms and financial institutions.
The monetary, fiscal and prudential authorities have also taken complementary measures,
adapting them flexibly to the health situation and the economic effects of the pandemic.
Also, in Europe, the expansionary stance of national policies has been supplemented by
supranational policies, notably the NGEU programme. Overall, these policies will not only
have headed off the materialisation of highly disruptive macro-financial scenarios in the
short term, but will also have limited the lasting damage this crisis might entail for the growth
potential of economies in the medium and long term.
In particular, the European Central Bank's (ECB) forceful monetary policy response has
helped the different agents in the euro area enjoy favourable financing conditions to absorb
such a severe shock. This has been particularly important in countries such as Spain, with
high government debt and budget deficit levels at the outset, which would otherwise have
had less room for manoeuvre to deploy equally forceful fiscal policies. The flexible use of
purchases under the ECB's Pandemic Emergency Purchase Programme (PEPP) has been
particularly important for preventing financial fragmentation problems in the euro area.
National policies were structured through various instruments. Particularly notable among
these in Spain are the greater flexibility in furlough schemes (ERTE, by the Spanish
acronym), the Official Credit Institute (ICO) guarantee facilities and direct assistance to firms.
Broadly speaking, these measures protected household income, employment relationships
and non-financial corporations' access to financing.
Thus, the recovery of pre-pandemic employment levels suggests that furlough schemes
have been effective in promoting the return to work.14 For example, we can conclude from
the more detailed analyses in the Annual Report that furloughed workers have had a greater
probability of returning to work than unemployed workers, although this difference
decreases as the time on furlough lengthens.
The ICO guarantee facilities15 met their goals effectively, insofar as they were able to cover
around 30% of the non-financial corporations sector's liquidity needs. This percentage is
higher in the case of firms in the sectors hardest hit by the crisis (39%) and, especially,
among small and medium-sized enterprises (SMEs) (70%). However, firms with no bank
debt before the pandemic only covered 18% of their liquidity needs through bank loans.
The guarantee facilities also appear to have fostered the supply of credit to SMEs and firms
in the sectors hardest hit by the crisis, particularly from financial institutions with lower
capital ratios.
As regards the solvency support measures for firms, according to Banco de España
estimates, the funding approved could cover all the capital shortfalls of firms generated in
2020 as a result of the crisis. Nevertheless, the use of such funding so far is estimated to
have contributed to reducing only a part of the SME solvency problems that arose as a
result of the pandemic.16 This could owe to the fund allocation criteria not including any
requirement relating to firms' financial position, among other reasons.
On the whole, the evidence available suggests that the public policy response has helped
reduce the long-term consequences of the pandemic-induced crisis. Specifically, the
measures implemented have managed to preserve most of the pre-pandemic employment
and avoided an increase in the rate of firm closure.
In particular, our latest Financial Stability Report highlights that, in the case of non-financial
corporations, although the recovery in sales and the more moderate debt growth in 2021
have prompted an improvement in businesses' financial situation, on average this continues
to be more vulnerable than before the pandemic. For example, the average debt and debt
burden ratios began to fall in 2021, and the percentage of firms with high debt decreased
across the board, standing close to pre-pandemic levels in the moderately affected and
largely unaffected sectors. In the severely affected sectors, however, it remained 7 pp higher
than in 2019.
In the case of households, the favourable course of the labour market and household
income in 2021 is also helping them to recover their economic and financial situation. In
2021, households' gross disposable income grew 2.2%, but was still 2.8% lower than in
2019. Between the onset of the health crisis and end-2021, households' aggregate net
wealth rose by 9.8%, driven by the revaluation of financial assets and, above all, of real
estate assets, in addition to the relative stability in debt. Overall, there has been a
broadbased decline in the bank debt-to-total asset ratio - particularly in the bottom net wealth
deciles - to below its pre-crisis level. Nevertheless, in the first net wealth decile, debt
continues to far exceed the value of assets (by around 50%), signalling this group's financial
vulnerability.
In any event, it ought to be borne in mind that the budgetary cost of the crisis has also been
very high. The government debt-to-GDP ratio stood at 118.4% at end-2021, 1.5 pp lower
than in 2020, but over 20 pp higher than the pre-pandemic level. Meanwhile, the budget
deficit fell from 10.3% to 6.9% of GDP in 2021, yet it remains over 3 pp of GDP above its
pre-crisis level.
The outlook for the Spanish economy: the impact of the war in Ukraine
The outbreak of war has prompted a worsening of growth prospects in the short term and
stronger inflationary pressures.
There are various transmission channels for this new shock. First, Russia and, to a lesser
degree, Ukraine are major producers of certain energy and non-energy commodities. The
outbreak of the war has given rise to a significant increase in many of their prices. A second
channel derives from the direct trade exposure to these countries, in addition to the indirect
exposure via a fall in demand from other, more exposed countries. Additionally, there is the
possibility of the global production chain disruptions being compounded, particularly amid
the sanctions imposed on Russia. A third channel is through the negative effects on
uncertainty and confidence. A fourth channel is the financial implications, insofar as
escalating inflationary pressures result in a tightening of the monetary policy stance.
Based on the analysis of these channels, the direct effects of the war on Spanish foreign
trade are expected to be moderate, as its bilateral trade flows with Russia are relatively
limited. Nevertheless, the indirect effects may be significant. Spain's share of energy
products imported from Russia is admittedly relatively small (6% of the total in 2019) and
lower than that of countries such as Germany and Italy (17% and 22%, respectively).
However, its high dependence on external energy sources and the impact of the war on
energy prices on the international markets have already triggered a major negative shock to
our international purchasing power. Given the crucial role of these commodities in
production processes and the limited capacity in the short term to substitute these energy
inputs from Russia, a hypothetical interruption of the supply of energy products from Russia
to Europe would have a significant impact on activity and inflation in the euro area. That
impact would be more pronounced in the economies that are more dependent on Russian
gas, with the consequent indirect effects on the Spanish economy. The war has also
adversely affected uncertainty, as shown by the fact that the decline in household
confidence in March, after the conflict broke out, was the largest in the time series.
Consequently, a delay in the gradual recovery that was under way in the Spanish economy
should be expected. Thus, the Banco de España's latest macroeconomic projections
described a scenario of weaker momentum in activity and greater inflationary pressure than
in the previous December 2021 projections.
Specifically, the projections envisage that GDP will grow by 4.5% in 2022, 2.9% in 2023
and 2.5% in 2024.
In the area of prices, the April projections pointed to an average rate of change of 7.5% in
the HICP in 2022. Inflation is expected to then drop sharply to 2% and 1.6% in 2023 and
2024, respectively. It should be stressed that this sharp slowdown is based on two
assumptions. The first is that there will be a slowdown in the growth of energy prices, in line
with those on the futures markets. The second is that a moderate wage growth response
and a squeezing of trade margins will prevent the emergence of the price-wage feedback
loop.
The economic outlook is, in any event, subject to a very high level of uncertainty. In fact, the
information that has become available since these projections were published would, in the
absence of further shocks, point to a new downward revision to GDP growth in 2022, due
to developments in Q1 being more unfavourable than expected. As regards inflation, the
new data suggest higher growth in the non-energy component, along with strong growth in
the energy component, albeit somewhat more modest than expected in April. Moreover, in
the coming months the Iberian mechanism to cap the price of gas and lower that of
electricity which was recently approved in Spain and Portugal, in agreement with the
European Commission, will foreseeably exert downward pressure on energy prices in Spain.
In any event, in the absence of any new shocks or an escalation of the war in Ukraine, such
a revision of the April 2022 projections would still be consistent with the Spanish economy
holding on a gradual recovery path - one that could see it reach pre-pandemic GDP levels
in the final stretch of 2023 - and with inflation rates remaining high in the coming months
and subsequently moderating gradually.
The rise in inflation
As I mentioned earlier, the rate of inflation rose significantly in 2021 worldwide and
accelerated further in early 2022. Moreover, this surge is proving to be more persistent than
initially expected.
The underlying causes of this increase include, first, the rapid recovery in demand following
the removal of the restrictions to contain the pandemic in an environment characterised by
continued production constraints.
Second, commodity prices, particularly those of energy commodities, have risen sharply on
international markets. Energy prices have been affected by a decrease in the supply of gas
for geopolitical reasons and a lack of infrastructure maintenance during confinement. The
gradual reduction of investment in fossil fuel extraction as a result of green policies in recent
years has also affected energy prices. These strains have increased drastically in 2022 with
the invasion of Ukraine by Russia and have spread to food.
Third, the recovery of supply has also been delayed by the emergence of bottlenecks. The
speed with which demand has recovered, and higher goods consumption as a result of the
pandemic, have put excessive strains on global production chains, which were still affected
in 2021 by the pandemic restrictions. This has led to input supply problems in industries
such as semi-conductors, plastics, wood and industrial metals, which have been
compounded by serious disruptions in goods transport.
In any event, despite the importance of global factors, the impact of the current inflationary
episode on the main world economies has been uneven. The variation in the extent of the
rise in inflation reflects various idiosyncratic factors that differ in nature, such as the differing
speed of the recovery in demand in each region. It also reflects other factors related to the
composition of the consumption basket, productive specialisation, positioning in global and
regional production chains, labour market slack, the anchoring of expectations and
exchange rate fluctuations.
Indeed, demand has been particularly vigorous in the United States, which has resulted in
more intense and earlier underlying inflationary pressures there. At the end of 2021 private
consumption stood more than 4% above its end-2019 level, with a very significant
contribution to this rise coming from consumer durables. In the euro area, meanwhile, it
stood around 3% lower.
PMI suppliers' delivery times show that supply bottlenecks are having a greater impact in
Europe and the United States. Germany has been the most vulnerable euro area country,
given that: (i) it is more integrated into, and occupies a central position in, value chains; (ii)
manufacturing - particularly the automotive industry - accounts for a high share of its
economy; and (iii) its productive processes are heavily reliant on imports of commodities
and inputs. In this regard, since summer 2021 more than 50% of German industrial firms
have reported the shortage of material and/or equipment as a factor limiting production, as
compared with 25% in Spain.
Higher energy prices are having a more acute impact on inflation in the advanced economies
and, especially, in the euro area. The greater contribution of the energy component to euro
area inflation is largely a result of this component accounting for a higher relative share of
the consumption basket in the euro area (10.9% of the total versus, for example, 7% in the
United States). Moreover, the euro area's high dependence on external energy sources has
been compounded by the depreciation of the euro in 2021 and the outbreak of the war in
Ukraine, which has also driven up the cost of the energy component of consumption.
The contribution of energy to the rise in inflation in the euro area is particularly important in
Spain and, to a lesser degree, Italy, given the larger contribution of the electricity
component. First of all, this is because, in Spain, energy, and electricity in particular,
account for a larger share of the consumption basket. While Spanish households devote
11.7% of their budget to energy, the euro area average is 10.9%. Regulatory and
pricesetting mechanisms are another factor responsible for the notable unevenness across euro
area countries in the pass-through to retail prices of the higher wholesale electricity price.
For instance, in Spain around 40% of households opt for a dynamic pricing system,
characterised by the high frequency of price revision, which explains the higher volatility of
the electricity component of inflation and, thus, the faster and stronger pass-through.
The rising inflation is also having an uneven impact on households and firms. In particular,
in recent months, lower-income households have experienced higher inflation because
staple goods, whose prices have shown a greater relative increase in recent times, account
for a larger share of these households' spending.
Consumer price inflation dynamics have gradually spread across the board since the
summer of 2021. Thus, underlying inflation has risen rapidly, exceeding 4% in mid-2021 in
the United States and 2% since end-2021 in the euro area. The underlying inflation rate has
continued to increase and in April reached a level of 3.5% in the euro area (the highest in
the history of the monetary union) and 3.4% in Spain (the highest since 2003). Additionally,
according to the preliminary estimates available, underlying inflation in the euro area
climbed to 3.8% in May.
As a result, the expenditure items in households' consumption basket with very high inflation
have increased significantly. In February, more than 30% of the expenditure items in
households' usual consumption basket experienced inflation above 4% both in Spain and
in the euro area. The proportion of consumption basket components with inflation rates
above 2% has increased significantly, from 30% in June 2021 to 80% in April. Meanwhile,
the percentage of items with a year-on-year price decrease is at a 15-year low.
Looking ahead, the available projections indicate that inflation in the euro area will remain
high in the coming months, moderating gradually thereafter to levels compatible with the
ECB's medium-term inflation target of 2%.
In any event, these forecasts are subject to considerable uncertainty. In particular, these
projections assume a slight reduction in energy commodity prices, in line with futures on
international markets, and a gradual easing of bottlenecks in the coming months. However,
the dynamics of these variables in the coming quarters will crucially depend on the scale
and persistence of the disruptions caused by the war in Ukraine, the extensive trade
sanctions imposed by Western countries on Russia and the retaliatory measures taken by
the latter. More generally, price developments will also depend on the effect of the war on
economic growth which, if greater than currently anticipated, could eventually reduce
inflationary pressures over the medium term.
However, other factors may also significantly determine the persistence of the current
inflationary episode. Particularly prominent among them are the indirect and second-round
effects on inflation that may stem from the latest price increases.
Indirect effects occur when, in an attempt to maintain profit margins, firms pass higher
energy costs through to the price of their products. To a certain extent, the spreading of
inflationary pressures beyond the energy component is already a reflection of this effect.
Profit margin indicators point to a recovery in the euro area in 2021, after the sharp fall in
2020. Margins in Spain appear to have been less buoyant and, according to several (still
partial) sources, even declined in the last stretch of 2021 and the first quarter of 2022.
Second-round effects arise when, in an attempt to preserve their purchasing power, workers
demand wage increases in line with inflation, driving up labour costs and putting additional
pressures on final prices. On the latest evidence, significant second-round and indirect
effects are not yet materialising in the euro area. Indeed, the latest data on wage settlements
point to employees bearing a considerable loss of purchasing power in recent quarters. The
limited pass-through of prices to wages could partly be the result of the relatively scant
prevalence of indexation clauses, after a long period of low and stable inflation. The
percentage of euro area private sector workers covered by this type of clauses in 2021 was
the lowest in recent decades.
However, if inflationary pressures persist, they are more likely to spill over into wage
negotiations and profit margins, thereby generating second-round and indirect effects on
inflation. In this respect, during 2021 H2, the percentage of collective bargaining
agreements signed in Spain with wage increases above 3% rose significantly. Also, in early
2022, a greater prevalence of indexation clauses - which update minimum wage rates if
past inflation exceeds a certain level - was observed in sectoral collective agreements. In a
similar vein, several surveys suggest that in the coming months business owners could pass
on to their customers a portion of the higher prices that they have already borne on many
of their inputs in recent quarters. These recent developments will require close monitoring
in the coming quarters.
Furthermore, these second-round effects would be more likely were the medium and
longterm inflation expectations to become de-anchored. Since mid-2021, market and opinion
indicators for long-term inflation expectations have risen, leaving behind the low levels of
the past two years and reaching rates close to, but slightly above, the 2% target. In the
United States, the professional forecasters surveyed by the Federal Reserve Bank of
Philadelphia have recently revised upwards their future inflation expectations more
substantially and expect inflation to stand at around 3% on average in five years' time.
In addition, some relatively structural issues have been cited more recently that could have
an impact on future price dynamics. In the past, it has been argued that some
transformations, such as globalisation, digitalisation and population ageing, may have
contributed to the low-inflation environment during the pre-pandemic period. However, the
pandemic and the war could disrupt the globalisation that the world economy has
experienced in recent decades, which, together with the need to implement measures to
fight climate change, could be consistent with higher inflation rates in the future.
Economic policies in the short term
In the context described, economic policies must continue to play a key role in minimising
the impact of the war in Ukraine on activity and inflation.
Fiscal policy
First, domestic fiscal policy should help to counter the war's adverse effects on activity. In
fact, the European Commission has recently proposed postponing the activation of the
Stability and Growth Pact for another year, until 2023. That said, there are two reasons why
the design of the measures should be very much geared towards meeting the needs of the
most vulnerable agents. The first is the high government indebtedness, which limits the
available scope for action. The second is the fact that the impact of the war is proving highly
asymmetric across sectors, firms and households. Thus, the efforts should focus on
supporting lower-income households, who bear the brunt of inflation, and the firms most
vulnerable to this new shock.
Moreover, any measures implemented should be temporary so as not to drive up the
structural budget deficit. They sho