Europe Slipping into Economic Peril?


The economic pressure over Europe is hard to quantify. I anticipated the Euro bloc to evade the slump of the pandemic though – admittedly – it happened rather quickly. I recently discussed in my recent article: Economic Duress Upending America’s Financial Stability?, quite a similar scenario panning out across the Atlantic as the United States faces the same oxymoronic situation – is too much progress gradually deteriorating the economy? I apply the same perspective as I analyze the economic agility of Europe. However, while the economic peril is hard to quantify, the problems and fissures relating to a particular country could certainly be utilized to portray a broader picture of the entire bloc.

Ironic how last year, the arching problem was how to skip past the pandemic with minimal economic damage. Policies were enacted and protocols were put into place across the globe to safeguard a stumbling economy. But now, the main issue is how to harness the rampant growth without actually risking the newfound stability. Complex right. Well, we’re just getting started!

Price pressures are a commonality nowadays across Europe. While one could make a fair point by emphasizing the trade bloc and its intertwined economic labyrinth throughout the continent, it still doesn’t justify the looming issue. As deeply as I have studied the European economy, it dawns on me that while financial turmoils surrounded the region, inflationary pressures were never the real foes. One more commonality explains the persistent price increase in such an expansive fashion. Supply constraints explain the problem by simply stressing the equation of demand and supply. In recent months, the shortage of raw materials (both imported and transported throughout the bloc) coupled with transportation bottlenecks have strangulated the manufacturing capability of the Euro bloc. With accumulated savings and a broadened span of time at home, the demand has surged in almost all industries. Thus, an accentuated demand in the face of a narrowed supply channel is what marks the basis of the inflationary pressures growing across the European continent: much less than the entire world.

Earlier last month Audi, Volkswagen’s biggest profit contributor, was forced to extend its summer break by a week last year; primarily due to the ‘volatile and tense’ semiconductor shortage. Many of the companies across an array of industries are facing massive shortages while the reemergence of the delta variant is resisting the labor to pump full gear into the workforce. With surging covid cases, the business confidence has further slipped in the Eurozone. The increasing threat of the pandemic exacerbated by the doubt reflected on the inoculation drives is adding more to the problems while the supply constraints continue to bloom as the world slips into uncertainty again. Consumer confidence has slipped for the first time in 2021 yet the inflationary pressures are sturdy despite reassurances of a transitory spike in selling prices by the European Central Bank (ECB).

In my opinion, the EU’s economic health is too complex to maneuver through in its entirety. However, it could be simplified by gauging the economic outlook revolving around a single country. Germany: Europe’s largest and the world’s third-largest economy. As we begin to unravel Germany’s position, Europe’s condition doesn’t appear exactly in shape. Germany’s annual Consumer Price Index (National Inflation Rate) recently peaked at 3.9% year-on-year, according to preliminary calculations. This is the most accelerated price increase in over a quarter of a century. Germany last witnessed such a speedy price increase back in December 1993 following the historic reunification of Germany. It is hard to even compare the two timelines.

While inflation raced at a rate of 4.3% after the fall of the Berlin Wall, it was on the back of a booming German economy. Today, the reality is anything but progressive and could hardly be deemed as an economic success. Germany’s Federal Statistics Office also announced that the consumer prices, adjusted to the rest of the European countries, accelerated at a befuddling rate of 3.4% year-on-year. Take your time and compare that to the hike of 3.1% registered last month. But that’s not all. Compare this off the roof price increase with the modest 2% mark set by the ECB. Shockingly, what used to be such a tedious level to achieve over the past decade was breached not once but over two consecutive months. 

Moreover, the data released shows that the surging inflation had already outpaced the German wage growth by the second quarter. If I were to weigh the possibilities at this point, I would think twice before shrugging off inflation as merely fleeting. The data shows that not only has the inflation barraged past the conservative 2% mark but is gradually eating away the consumer’s spending power while the delta threat is forcing labor delays. A sage mind would subconsciously realize that the only way out would be a wage hike to entice workers back to work. Similar to the United States, wages would be readjusted to incentivize the workers especially when labor shortages are almost certainly placing workers in the bargaining power. Thus, it’s safe to assert that as inflation is peaking, with delta surge across the world (primarily in China) and wage hike on the horizon, a deceleration in the price rise is highly implausible any time soon.

A poll conducted by Bloomberg revealed that the majority of the 3000 German companies surveyed expect the supply chain problems to persist through 2021. The survey also revealed that with const pilling, the companies are resorting to dumping excessive costs onto the consumers. It is quite justified, therefore, to argue the clarity of the ECB’s outlook regarding inflation given Europe’s largest economy is struggling towards price stability. It is also worth pondering that with Brexit detaching the UK as a dependable economic powerhouse followed by thorough competition from Chinese exporters, another global rebound may prove more detonating to Europe’s manufacturing sector while inflation continues to persist. 

While the service sector is performing dismally, the manufacturing industry is the flicker of hope that could reign in growth to hedge inflation. However, it is reported that China has bloomed as a major exporter to the EU: contributing a baffling share of 68.2% of all EU’s imports in 2019. Compare that to China’s share of 50.7% just two decades ago. Thus, with raging competition from China and a political shuffle on cards later this month, Germany has its palate full of unanswered questions and mounting economic and geopolitical pressures that could paralyze the European Union.  

I have my eye on the policymakers across the globe as adjustments are highly likely to affix to the monetary policy. US Federal Reserve’s Chairman, Jerome Powell, made a spectacle in Jackson Hole Economic Symposium by reiterating his commitment to Fed’s dovish stance to garner full employment before tapering or raising interest rates. Similarly, the ECB is scheduled to convene on 9th September and would be under the spotlight to either elevate its bond purchases (to further cushion the economy) or relent back (to witness a plummeting Euro). Either way, a strong decision with distinct consequences. 

While Deutsche Bundesbank, Germany’s Central Bank, stands with the view of a drop in inflation next year, I presume that inflation would mount as high as 5% year-on-year before settling low as supply bottlenecks broaden and employment picks pace. Moreover, while many economists are of the view that a wage-price spiral might not ensue, I assume a perverse position. With expanding Chinese influence in Germany’s manufacturing sector; imports ranging from pharmaceuticals to machinery, a political shift in a few weeks, and the tendency of German businesses to pass costs onto consumers, a wage-price spiral seems probable enough to sustain inflation at an elevated level – at least in the short-medium run. I could, lastly, reflect my inference on much of Europe as ECB wrestles the notion that continues to beleaguer most of the economists (even myself): is too much inflation a concern? And at what cost?

Syed Zain Abbas Rizvi
Syed Zain Abbas Rizvi
The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.


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