Brussels’ bleak scenario for the European economy

The shock wave of the war in Ukraine is spreading at full speed across the Old Continent. Since the outbreak of the conflict in late February, economic indicators have continued to worsen one after another. After the IMF and OECD The European Commission has significantly cut its European growth forecasts for 2022, released on Monday, May 16, from 4% to 2.7%. For 2023, Brussels also lowered its GDP growth rate from 2.7% to 2.3%.

After a dizzying fall in 2020 at the peak of the pandemic at -5.9%, the European economy rebounded in 2021 at 5.4% before returning to a zone of severe turbulence. Between runaway inflation, skyrocketing prices in energy and commodity markets, and an increase in interest rates announced by the European Central Bank (ECB) a few days ago, the economic horizon has darkened significantly since the winter.

To combat inflation, Christine Lagarde (ECB) initiates an increase in interest rates

Big hit to growth in Germany

The war in Ukraine seriously slowed down the German economy. European Commission statisticians cut their forecasts for German GDP growth by two points to 1.6% in 2022 from 3.6% on February 10. It must be said that the economy on the other side of the Rhine is heavily dependent on Russian energy for the development of its industry.

In addition, supply constraints continue to weigh on the automotive industry, which is a heavyweight in the German economic model. As a result, Germany, the eurozone’s largest economy, should stop being the engine of Europe’s economy this year, given its accumulation of setbacks since the start of the pandemic. Some observers now feel free to talk about the “sick man” of Europe. For the traffic light coalition led by Olaf Scholz (SPD), this slow growth could weaken post-Merkel Germany.

German trade balance in danger: exports fall, imports rise

Growth in France should also slow down in 2022.

The engines of the French economy are also bouncing back. After a strong recovery of around 7% in 2021, GDP growth should slow to 3% in 2022 and 1.8% in 2023. Last February, Brussels forecast growth of 3.6% this year and 2.1% in 2023. also lowered their growth rates. According to forecasts from the Bank of France and INSEE, the tricolor economy froze in the first quarter, and recovered slightly in the second quarter (0.2%). Consumption, traditionally France’s strong point, has slowed since the beginning of the year, driven by sharp price increases and falling consumer and business confidence.

Despite all the government’s measures to curb the inflationary spiral (tariff shield, 18 cents discount on petrol), the French are expecting the decline in purchasing power announced by INSEE for the first half of the year. The new government, to be announced in the coming hours, will have the daunting task of presenting a new post-legislative amended budget with a “purchasing power package” designed to limit the macroeconomic impact of this war if it doesn’t want to quickly face social anger. Indeed, wage increases resulting from negotiations in companies since the beginning of the year are very far from offsetting the increase in the price index by about 5%, as a study by the Bank of France made clear last week. As a result, the real incomes of many French employees are likely to fall sharply.

Inflation 5%, almost zero growth…, INSEE’s gloomy forecasts for the French economy

Massive blow to the Italian economy, Spain in decline

Among the other major powers in the eurozone, the Italian economy is in very poor shape. The European Commission forecasts GDP growth of 2.4% in 2021 and 1.9% in 2023. Last February, the Brussels institution projected GDP growth to accelerate by 4.1% and 2.3% in 2023. The series of crises of recent years has left deep marks on the productive fabric of the peninsula, which is highly dependent on its foreign trade. Despite a relatively solid recovery plan, the Italian government must contend with two of the biggest weaknesses in southern Europe’s economy: sluggish growth and sluggish productivity.

As for Spain, it must limit the damage. The European Commission predicts activity growth of 4% in 2022 and 3.4% in 2023. On February 10, European statisticians predicted an acceleration of 5.6% in 2022 and 4.4% in 2023. The Spanish economic model has recovered in recent months. However, the slowdown in the European economy and the continuation of the war may limit the plans of many tourists this summer.

Inflation at 6.8% in 2022

The terrible conflict in Ukraine has significantly accelerated the rise in prices on the Old Continent. Between rising gas and oil prices, a surge in agricultural raw materials, and a shortage of some inputs, Inflation calculated by the European Commission could rise to 6.8% in 2022 and then fall to 3.2% next year. Before the war, the European Commission was targeting inflation of 3.9% in 2022 in the EU of 27 (3.5% in the euro area) before falling to 1.7% in 2023. raise the price of sea and air freight, or even some electronic components.

As a result, the European Central Bank has already begun to tighten its monetary policy, announcing the end of its Emergency Asset Purchase Program (PEPP) set up at the height of the pandemic and raising rates next summer. The equation for its president, Christine Lagarde, must be especially dangerous. Indeed, a tightening of monetary policy could be disastrous for European activity, barely emerging from the long tunnel of the health crisis.