Inflation is clearly a problem for the European Union as a whole, but non-eurozone member states face a greater challenge and their choices may be more crucial. Anti-inflationary decisions in these countries – namely Bulgaria, Czechia, Hungary, Poland, Romania and Sweden – may directly affect the exchange rate of the national currency. Yet, with their own currencies, these countries also have an influence on inflation via interest rates.
We looked at the inflation-tackling measures of non-eurozone EU countries between September 2021 and January 2023, using Bruegel research , European Commission and Eurostat statistics, and our own research in partnership with Czechia’s Denik Referendum (within the European Data Journalism Network).
The bottom line is simple: a non-eurozone country is a much smaller economic unit than the sprawling eurozone as a whole. Within the eurozone, a country’s introduction of, for example, a price cap or one-off subsidy carries a minor (though not negligible) risk in terms of inflation. Strong economic interconnection with other eurozone countries dilutes the consequences of any measure within one country. For example, the reaction of the international market to it is not reflected in the country’s exchange rate but rather in that of the entire euro, which limits the direct inflationary potential. Hence, the government of a non-euro country needs to be more cautious in general: any wrong decision could well trigger noticeable inflation.
Besides, non-eurozone EU countries can conduct their own monetary policy through their own central banks. This includes raising and lowering the base rate, issuing money or, conversely, reducing the amount of money in the economy by selling sovereign bonds. Basically, if more money is in circulation in the economy – for example because interest rates are very low – this will increase inflation as people spend their money and thus push up prices.
So central bank policies can play a big role in inflation. This is not the subject of this article, but it is worth bearing in mind that the countries we studied also differ in their central bank policies, which is probably related to the impact of their other measures on inflation. This article simply points out that pro-citizen economic decisions do not in themselves lead inevitably to disaster. Which is not to say that, for example, a bad tax cut coupled with a problematic interest-rate policy or too much energy dependence cannot have serious inflationary consequences.
But on the other hand, just because a country is not a member of the euro area does not mean that it is immune from the international economic processes that drive inflation. The impact of inflation is being felt everywhere. In December 2022, the last reading for the period under review, inflation was 14.3% in Bulgaria, 16.8% in Czechia, 25% in Hungary, 15.3% in Poland, 14.1% in Romania and 10.8% in Sweden. The EU average was 10.4%, so it can be said that the non-eurozone members were above average in terms of inflation – with Hungary being the European record holder.
Inflation is therefore a fact, which raises the question of how EU countries might try to help their citizens and businesses. The most common approaches are VAT cuts (often on energy), price caps, direct payments to the most vulnerable social groups, windfall-profit taxes, and subsidies for industry.
Outside the euro area, prudent member states might theoretically be better off by giving less money to households, since such direct payments are particularly likely to trigger inflation.
The reality does not point in that direction. It is the most cautious member state, Hungary, that is suffering the most from inflation. Before the elections, Hungary’s government did adopt a number of economic measures that could have fuelled inflation, such as direct payments to citizens. But Hungary has not used the instruments at its disposal to tackle the inflation crisis.
Sweden, which has the lowest inflation of the group, stands out from the others for its location and economic situation before the crisis. However, the Swedish example shows that even relatively ambitious public compensation measures do not necessarily lead to high inflation. As for the countries in Central and Eastern Europe, the various crisis measures have not led to significant differences in inflation levels. So it seems that less is sometimes more when it comes to inflation management, if not in terms of public support.
Tax and VAT cuts
Regarding actual measures, Sweden opted for a VAT cut on fuel prices, setting the lowest rate allowed by the EU, thus reducing the cost of a litre of petrol by €0.17 for Swedes between June and October 2022. In Bulgaria, the state waived VAT for small businesses from October 2021 to December 2024. It was given the green light to do so by the EU, even though the move is somewhat contrary to the single-market rules. The Hungarian government, on the other hand, chose a different way to cut taxes, targeting not VAT but rather the social-contribution tax and municipal taxes . In numerical terms, this was one of the biggest tax cuts in Europe.
Like Bulgaria, Poland chose to cut VAT: in January 2022, as part of a package known as the “anti-inflation shield”, VAT on food, gas and pesticides was cut to 0%, on petrol and diesel to 8% and on heating to 5% for six months. Romania reduced the VAT on energy to 5%. Czechia followed the same path, reducing it to zero. Czechia also helped companies to go green with VAT rebates, and abolished road tolls for almost all vehicles except lorries.
Overall, VAT reductions have proved to be the most popular instrument in this category, with Poland being the absolute record holder outside the eurozone.
It is worth noting that several countries have, as we will see later, made targeted payments instead of VAT reductions. The aim of such payments is roughly equivalent: to leave more money in the pockets of consumers and businesses.
Price caps, or price controls, have also proved to be a popular tool among non-eurozone member states, although most have been highly targeted. Bulgaria froze the