Assessing the European trajectory

Lina Klesper is a Legal Assistant at PKF Malta, an audit and consultancy firm

In a meeting with the Malta Council for Economic and Social Development, Finance Minister Clyde Caruana argued that high inflation will again be inevitable in 2024. This could mean higher interest rates, dampening economic growth even if Malta is forecasting a GDP growth of 3.9 per cent for 2023  economic concerns to geopolitical tensions. Europe's path forward is riddled with uncertainties and complexities.

The “new normal” as life after the COVID-19 pandemic is described, is seeing the return of old, all too familiar risks with the cost-of-living crisis spearheading the ranking of short-term risks as identified by the World Economic Forum in its Global Risks Report 2023.  The year 2023 so far, is characterized by the aftereffects of COVID-19 and the war in Ukraine which are most noticeable with inflation, recession, and normalization of monetary policies.  This decade seems to have slid economically into a low-growth, low-investment era with the climate crisis being the prevailing risk globally.  Hence, the question arises where Europe is headed considering current developments.

To look at the bigger picture first, the recent discussions about the slowdown of the U.S. economy have cast a shadow of uncertainty on the global economic outlook. While some experts predict a soft landing for the U.S. economy, the situation remains a topic of vigorous debate.  In the U.S. inflation came down from 9.1% last summer to 3.2%, but prices have increased about 18% compared to pre-pandemic times with increasing and volatile gas prices adding to the financial sting. The U.S. economy is showing signs of vulnerability through restrictive monetary policy and sluggish money and credit growth.  It is a fact that inflation will take time to subside and interest rates will likely stay high and even could be further elevated to the detriment of American´s money.  However, current estimates for Q3 2023 show a more nuanced and rather bright outlook.  The case for a 2023 US recession is crumbling.  What is being felt in the U.S. is more of a business-cycle slowdown than a typical recession. If a soft landing can actually be achieved by the Fed´s efforts to establish a low and stable inflation rate without triggering a recession and increasing unemployment rates excessively, will be certain at the beginning of 2024.  So far, the country´s job market is proving to be strong with unemployment rates steadily declining, and the economy is showing incredible resilience despite the banking crisis and recent major layoffs in the tech and media industry. To conclude, the odds seem to be low for a recession to hit this year, but it is not to underestimate that measures taken by the Fed will have a significant influence on the rest of the global economy.

Zooming out further, the Chinese economy is also grappling with a slowdown that also poses risks to global growth.  Just recently, the U.S. showed concerns about Beijing withholding data that could potentially reveal new weaknesses in the recovery of the world´s second-biggest economy.  Hence, the U.S. urged Beijing to transparency in the publications of its data.

In parallel, Europe is facing its particular economic challenges having on-and-off flirtations with recession.  While the euro area had an excellent growth rate of 3.5% in 2022, which exceeded the U.S. and China, a slowing down of the economy started in the last quarter of 2022.  The expected growth rate for the eurozone this year is expected to be 0.8%.  The economic slowdown can be partially explained by the energy independence challenge, which remains costly for families and continues to fuel inflation, which came in at 5.3% for August.

The European Green Deal, once heralded as a beacon of hope for a sustainable future, appears to be facing headwinds. The momentum behind this ambitious initiative seems to be waning, exemplified by the resignation of Frans Timmermans, the father of the Green Deal, as the Executive Vice President of the European Commission for the European Green Deal and as the European Commissioner for Climate Action to pursue local politics in the Netherlands. This shift in leadership raises questions about the long-term commitment of European nations to tackling environmental issues and energy independence at a systemic level.  In her last speech in office about the situation in the EU, the current president of the EU Commission Ursula von der Leyen, cautiously countered China and defended the Green Deal but failed to create a spirit of optimism.

Until the EU elections in nine months, she will have to do a lot more convincing since there remains great uncertainty about the intended drastic and costly Green Deal measures in the member states.  Particularly reducing bureaucracy should be on the EU´s priority list as excessive regulations and paperwork are leaving farmers, entrepreneurs as well as public authorities suffocating the crippling effects of the green deal.

Evidently, the eurozone is facing a double crisis from the geopolitical impact of Russia´s war against Ukraine and the subsequent economic implications for Europe. While the geopolitical crisis has global impacts also on the U.S., Europe is most seriously impacted with Germany notably grappling with the prospect of a mild recession. The Sentix economic index for the eurozone is foreshadowing a deepening recession substantially inflicted by the weight of Germany´s stumbling economy. Germany is seeing exports fall due to flagging global demand with investors as well as businesses remaining pessimistic.  Indeed, German industrial production is disappointing again, especially in energy-intensive sectors, where a drop can be seen for the third month in a row.  Most worrisome is Germany´s dwindling international competitiveness. The lack of sufficient investment and structural reforms over the past decade can be seen as the cause of the current German trajectory.  The pandemic and the war in Ukraine are additional factors that worsen the situation.

Having been in a recession for the last three months of 2022 and the first three months of this year, Germany fears that the economy will again stagnate in the third quarter as it did in the previous quarter.  This would leave the country on the brink of another recession.  Germany, as the economic powerhouse of the eurozone is looking like the sick man of Europe, seemingly casting a shadow over the global economy. Nevertheless, the European Commission seems confident that a recession in the eurozone can be avoided for now.

Europe's path forward is multifaceted, marked by both challenges and opportunities that will shape the continent's trajectory in the years to come. A “new normal” of stagnation of industry and economy has established itself, while a sense of urgency increased. The economic uncertainties, geopolitical struggles, financial intricacies, and environmental ambitions all intertwine to form a complex narrative. Taking on and navigating the prevailing crosscurrents requires a delicate balance of diplomatic finesse, strategic planning, and collective determination. Policymakers must keep in mind the influence their measures could have on the global economy and that growth challenges are not done away with quick policy fixes. This indeed is a delicate balancing act.