Finance
WSJ: Europeans are becoming poorer
The average EU country poorer per head than every U.S. state except Idaho and Mississippi, according to a report this month by the ‘European Centre for International Political Economy’, a Brussels-based independent think tank.
If the current trend continues, by 2035 the gap between economic output per capita in the U.S. and EU will be as large as that between Japan and Ecuador today, the report said.
‘Yes, we’re all worse off,’ Europeans complain. An aging population that values its free time set the stage for economic stagnation. Then came Covid-19 and Russia’s war in Ukraine, ‘Wall Street Journal’ writes with some malice.
Europeans are facing a new economic reality, one they haven’t experienced in decades. They are becoming poorer.
Life on a continent long envied by outsiders for its art de vivre is rapidly losing its shine as Europeans see their purchasing power melt away.
The French are eating less foie gras and drinking less red wine.
Spaniards are stinting on olive oil. Finns are being urged to use saunas on windy days when energy is less expensive.
Across Germany, meat and milk consumption has fallen to the lowest level in three decades and the once-booming market for organic food has tanked.
Italy’s economic development minister, Adolfo Urso, convened a crisis meeting in May over prices for pasta, the country’s favorite staple, after they jumped by more than double the national inflation rate.
With consumption spending in free fall, Europe tipped into recession at the start of the year, reinforcing a sense of relative economic, political and military decline that kicked in at the start of the century.
Europe’s current predicament has been long in the making. An aging population with a preference for free time and job security over earnings ushered in years of lackluster economic and productivity growth. Then came the one-two punch of the Covid-19 pandemic and Russia’s protracted war in Ukraine. By upending global supply chains and sending the prices of energy and food rocketing, the crises aggravated ailments that had been festering for decades.
Governments’ responses only compounded the problem. To preserve jobs, they steered their subsidies primarily to employers, leaving consumers without a cash cushion when the price shock came.
In the past, the continent’s formidable export industry might have come to the rescue. But a sluggish recovery in China, a critical market for Europe, is undermining that growth pillar. High energy costs and rampant inflation at a level not seen since the 1970s are dulling manufacturers’ price advantage in international markets and smashing the continent’s once-harmonious labor relations. As global trade cools, Europe’s heavy reliance on exports — which account for about 50% of eurozone GDP versus 10% for the U.S. — is becoming a weakness.
Private consumption has declined by about 1% in the 20-nation eurozone since the end of 2019 after adjusting for inflation, according to the Organization for Economic Cooperation and Development, a Paris-based club of mainly wealthy countries. In the U.S., where households enjoy a strong labor market and rising incomes, it has increased by nearly 9%.
The European Union now accounts for about 18% of all global consumption spending, compared with 28% for America. Fifteen years ago, the EU and the U.S. each represented about a quarter of that total.
Adjusted for inflation and purchasing power, wages have declined by about 3% since 2019 in Germany, by 3.5% in Italy and Spain and by 6% in Greece.
The pain reaches far into the middle classes. In Brussels, one of Europe’s richest cities, teachers and nurses stood in line on a recent evening to collect half-price groceries from the back of a truck.
The vendor, Happy Hours Market, collects food close to its expiration date from supermarkets and advertises it through an app. Customers can order in the early afternoon and collect their cut-price groceries in the evening. “Some customers tell me, because of you I can eat meat two or three times per week,” said Pierre van Hede, who was handing out crates of groceries.
Spending on high-end groceries has collapsed. Germans consumed 52 kilograms of meat per person in 2022, about 8% less than the previous year and the lowest level since calculations began in 1989. While some of that reflects societal concerns about healthy eating and animal welfare, experts say the trend has been accelerated by meat prices which increased by up to 30% in recent months. Germans are also swapping meats such as beef and veal for less-expensive ones such as poultry, according to the Federal Information Center for Agriculture.
Weak spending and poor demographic prospects are making Europe less attractive for businesses ranging from consumer-goods giant Procter & Gamble to luxury empire LVMH, which are making an ever-larger share of their sales in North America.
“The U.S. consumer is more resilient than in Europe,” Unilever’s chief financial officer, Graeme Pitkethly, said in April.
The eurozone economy grew about 6% over the past 15 years, measured in dollars, compared with 82% for the U.S., according to International Monetary Fund data.
That has left the average EU country poorer per head than every U.S. state except Idaho and Mississippi, according to a report this month by the European Centre for International Political Economy, a Brussels-based independent think tank.
If the current trend continues, by 2035 the gap between economic output per capita in the U.S. and EU will be as large as that between Japan and Ecuador today, the report said.
Weak growth and rising interest rates are straining Europe’s generous welfare states, which provide popular healthcare services and pensions. European governments find the old recipes for fixing the problem are either becoming unaffordable or have stopped working. Three-quarters of a trillion euros in subsidies, tax breaks and other forms of relief have gone to consumers and businesses to offset higher energy costs — something economists say is now itself fueling inflation, defeating the subsidies’ purpose.
Public-spending cuts after the global financial crisis starved Europe’s state-funded healthcare systems, especially the U.K.’s National Health Service.
Huw Pill, the Bank of England’s chief economist, warned U.K. citizens in April that they need to accept that they are poorer and stop pushing for higher wages. “Yes, we’re all worse off,” he said, saying that seeking to offset rising prices with higher wages would only fuel more inflation.
With European governments needing to increase defense spending and given rising borrowing costs, economists expect taxes to increase, adding pressure on consumers. Taxes in Europe are already high relative to those in other wealthy countries, equivalent to around 40-45% of GDP compared with 27% in the U.S.
The pauperization of Europe has bolstered the ranks of labor unions, which are picking up tens of thousands of members across the continent, reversing a decadeslong decline, stresses WSJ.
US firms are barreling towards a giant wall of corporate debt that’s about to mature over the next few years, Goldman Sachs strategists said in a note.
There’s $1.8 trillion of corporate debt maturing over the next two years, Goldman Sachs estimated. Firms could be slammed with higher debt servicing costs as interest rates stay elevated. That could eat into corporate revenue and weigh on the US job market.
The investment bank estimated that $790 billion of corporate debt was set to mature in 2024, followed by $1.07 trillion of debt maturing in 2025. That amounts to $1.8 trillion of debt reaching maturity within the next two years, in addition to another $230 billion that will reach maturity by the end of this year, Goldman strategists said.
The wave of debt that will need to be refinanced could spell trouble for companies, as interest rates have been raised aggressively by the Fed over the last year. The Fed funds rate is now targeted between 5.25%-5.5%, the highest range since 2001.
For every extra dollar spent to service their debt, firms will likely pull back on capital expenditures spending by 10 cents and labor spending by 20 cents, the strategists estimated, a reduction that could weigh down the job market by 5,000 payrolls a month in 2024 and 10,000 payrolls a month in 2025.
Experts have warned of trouble for US corporations as credit conditions tighten. Already, the tally of corporate debt defaults in 2023 has surpassed the total number of defaults recorded last year. As much of $1 trillion in corporate debt could be at risk for default if the US faces a full-blown recession, Bank of America warned, though strategists at the bank no longer see a downturn as likely in 2023.
“Tens of billions in dollar terms are stuck in Russia,” the chief executive of one large company domiciled in a country told ‘The Financial Times’. “And there is no way to get them out.”
Western companies that have continued to operate in Russia since Moscow’s invasion of Ukraine have generated billions of dollars in profits, but the Kremlin has blocked them from accessing the cash in an effort to turn the screw on “unfriendly” nations.
Groups from such countries accounted for $18 billion (€16.8 billion) of the $20 billion in Russian profits that overseas companies reported for 2022 alone, and $199 billion of their $217 billion in Russian gross revenue.
Many foreign businesses have been trying to sell their Russian subsidiaries but any deal requires Moscow’s approval and is subject to steep price discounts. In recent days British American Tobacco and Swedish truck maker Volvo have announced agreements to transfer their assets in the country to local owners.
Local earnings of companies from BP to Citigroup have been locked in Russia since the imposition last year of a dividend payout ban on businesses from “unfriendly” countries including the US, UK and all EU members. While such transactions can be approved under exceptional circumstances, few withdrawal permits have been issued.
US groups Philip Morris and PepsiCo earned $775 million and $718 million, respectively. Swedish truck maker Scania’s $621 million Russian profit in 2022 made it the top earner among companies that have since withdrawn from the country. Philip Morris declined to comment. PepsiCo and Scania did not respond to requests for comment.
Among companies of “unfriendly” origin that remain active in Russia, Austrian bank Raiffeisen reported the biggest 2022 earnings in the country at $2 billion, according to the KSE data.
US-based businesses generated the largest total profit of $4.9 billion, the KSE numbers show, followed by German, Austrian and Swiss companies with $2.4 billion, $1.9 billion and $1 billion, respectively.
‘The Financial Times’ reported last month that European companies had reported writedowns and losses worth at least €100 billion from their operations in Russia since last year’s full-scale invasion.
German energy group Wintershall, which this year recorded a €7 billion non-cash impairment after the Kremlin expropriated its Russian business, has “about €2 billion in working interest cash… locked in due to dividend restrictions”, investors were told on a conference.
“The vast majority of the cash that was generated within our Russian joint ventures since 2022 has dissipated,” Wintershall said last month, adding that no dividends had been paid from Russia for 2022.
Russian officials are yet to outline “a clear strategy for dealing with frozen assets”, said Aleksandra Prokopenko, a non-resident scholar at the Carnegie Russia Eurasia Centre. “However, considering the strong desire of foreign entities to regain their dividends, they are likely to explore using them as leverage – for example to urge western authorities to unfreeze Russian assets.”
A special meeting of African ministers in charge of transport and energy held from 12-15 September on the theme, “Accelerating Infrastructure to Deliver on the AU Agenda 2063 Aspirations” has concluded with an action-oriented Zanzibar Declaration aimed at spurring the Continent’s transport and energy sectors.
Convened under the auspices of the African Union’s Fourth Ordinary Specialized Technical Committee on Transport, Transcontinental and Interregional Infrastructure and Energy, the meeting was organized by the African Union Commission (AUC) in collaboration with the African Union Development Agency (AUDA-NEPAD), the African Development Bank (AfDB) and the United Nations Economic Commission for Africa (ECA).
Speaking at the Ministerial segment of the meeting, Robert Lisinge, Acting Director of the Private Sector Development and Finance Division at the ECA called on member states to address the barriers limiting private sector investments in infrastructure and energy, urging them to facilitate investments by creating conducive policy and regulatory environments. “The requirements of continental infrastructure development and the aspirations of Agenda 2063 and Agenda 2030 far exceed current levels of public sector investment,” he said.
He stressed that over the next ten years, there is a need for concerted action to address energy transition and security issues, in order to open up opportunities for the transformation of the continent. He cited ECA’s analytical work on the AfCFTA, which demonstrates there are investment opportunities for infrastructure development in the area of transport and energy and added that digitization and artificial intelligence offer great opportunities for the efficient operation of infrastructure.
According to the Zanzibar Declaration, the Ministers adopted the AUC and ECA continental regulatory framework for crowding-in private sector investment in Africa’s electricity markets. This framework will be used as an instrument for fast-tracking private sector investment participation in Africa’s electricity markets. The Declaration also called on ECA and partners to develop a continental energy security policy framework as called for by the 41st Ordinary Session of the Executive Council and an Energy Security Index and Dashboard to track advancements in achieving Africa’s energy security.
The meeting acknowledged the efforts by ECA to support Member States in coordinating Public-Private Partnerships (PPP) with development partners and the establishment of the African School of Regulation (ASR) as a pan-African centre of excellence to enhance the capacity of Member States on energy regulation.
The Declaration requested the ECA and partner institutions to further act in the following areas:
The AUC, in collaboration with AUDA-NEPAD, ECA, AfDB, RECs, Africa Transport Policy Programme (SSATP), and the African Continental Free Trade Area (AfCFTA) Secretariat to implement the roadmap on the comprehensive and integrated regulatory framework on road transport in Africa.
ECA, in collaboration with AUC, to identify innovative practices and initiatives that emerged in the aviation industry in Africa during the COVID-19 pandemic and propose ways of sustaining such practices, including the development of smart airports with digital solutions for improved aviation security facilitation and environmental protection.
ECA, in collaboration with AUC, to establish mechanisms for systematic implementation, monitoring and evaluation of continental strategies for a sustainable recovery of the aviation industry.
The AUC, AUDA-NEPAD, AfDB and UNECA to engage with development partners and Development Finance Institutions (DFIs) to mobilize resources for projects preparation and implementation of PIDA-PAP 2 projects.
ECA and AUC, in collaboration with partners, to coordinate PPP initiatives to avoid duplication of efforts and strengthen complementarity.
The AUC and ECA to work with continental, regional and specialized institutions to support the design and implementation of programmes, courses, and capacity development initiatives of the African School of Regulation (ASR) to support the implementation of the African Single Electricity Market and Continental Power System Master Plan.
The AUC to work with AUDA-NEPAD, AfDB, ECA and RECs, respective power pools, regional regulatory bodies, and relevant stakeholders to design continental mechanisms for regulating and coordinating electricity trade across power pools.
AUDA-NEPAD, AUC, AFREC, ECA, AfDB, Power pools and development partners to comprehensively assess local manufacturing of renewable energy technologies and beneficiation of critical minerals for battery manufacturing.
ECA and AFREC to accelerate the implementation of the Energy4Sahel Project to improve the deployment of off-grid technologies and clean cooking in the affected Member States.
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