The real scale of the coming crisis in Europe

(ORDO NEWS) — Some believe that the energy crisis raging in Europe will grow into a comparable scale to the financial crisis of 2008, writes a Chinese economist in an article for Huanqiu Shibao. He notes that it is too early to make such pessimistic forecasts.

The mayor of London warned that the impact of the current energy crisis on ordinary British families “will be no less than the international financial crisis of 2008”, which once again drew attention to the “approaching winter”. The turmoil in the EU energy market has caused widespread concern among its participants and the population. Come even believe that the energy crisis will have a Legman Brothers effect on the European economy.

Objectively speaking, the fact that Europe is currently experiencing the worst energy crisis in history is not empty words. Just last week, European benchmark natural gas prices rose another 21%, more than 14 times the average for the past decade. The plight of people in Europe is becoming more visible, with Germany expecting gas alone for German households to rise to €3,568 this year, and electricity bills for British households to hit £500 by the end of the year. Millions of people in Germany, the UK and other European countries will soon be unable to afford their electricity bills, and household disposable income and consumption levels are on a marked downward trend.

At present, the negative factors of the European energy crisis on the economy are mainly spread in the following directions.

First, it is imported inflation. Since the second half of last year, the most important cause of inflation in the EU and member countries has been the wild rise in energy prices. In July, its level in the euro area rose to 8.9%, in Germany it rose to a nearly 40-year high of 8.5%, and its pace in the energy sector exceeded 30% for six consecutive months. In such conditions, as a rule, the willingness and level of consumption suffers. The share of European spending on basic needs will inevitably rise, and, contrary to the basic logic of rising inflation, contribute to consumption in the future.

Second, the real economy and economic confidence suffered. For some manufacturing industries in Europe, the pressure of rising energy consumption on production costs and business operations cannot be underestimated. For example, many aluminum companies in the Netherlands, the Czech Republic and other countries were forced to close due to the sharp rise in energy prices.

BASF and other major companies in Germany have already issued a warning that due to a lack of gas, factories may stop. With high inflation, energy problems and declining consumption, the European economic community is becoming increasingly pessimistic about its future prospects. Composite index of business activity in the euro area, published in August by S&P Global, fell to its lowest level in 18 months.

Thirdly, the circulation of currency in the field of foreign trade forms a vicious circle. On the one hand, negative expectations for the European economy led the market to take a bearish stance against the euro and European financial assets denominated in euros. The euro has even fallen below 1:1 against the dollar, and the euro itself against the dollar has fallen by more than 13% since the beginning of the year.

On the other hand, since energy and other commodities are mostly dollar-denominated, the weakening of the euro has further exacerbated the EU’s trade deficit. In the first half of 2022, the EU’s foreign trade had a huge deficit of 200.7 billion euros, of which 376.3 billion were accounted for by energy imports, which is 151.5% more than last year. Before the pandemic, the volume of annual energy imports to the EU was only about 300 billion. The energy problem is linked to the weak euro exchange rate, which further exacerbates rising costs and the decline in the competitiveness of EU industry.

Thus, the energy crisis has brought a lot of trouble to the European economy, but it is too early to predict that the EU economy may face such big troubles as a financial or European debt crisis. First, the EU and the Eurozone maintained some positive growth in the first two quarters, and it remains to be seen whether the European economy will fall into recession due to issues such as the Russian-Ukrainian conflict. Secondly, employment in the EU and Eurozone remains relatively stable.

In June 2022, the unemployment rate in the EU and the Eurozone was 6% and 6.6% respectively, and there was no severe unemployment this year, which will help Europe avoid wider economic and livelihood problems. However, the energy crisis is already causing the European Union to sound the alarm, and the approaching harsh winter will also bring new challenges to its economy and energy security. Therefore, the EU and its member states should probably adjust their concept of energy security and cooperate more actively with the world in order to solve their own and the common tasks facing the global community.


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