The European economy faces many obstacles

Recently released statistics showed that hyperinflation rates, stagnant production activities, and many bankrupt businesses, have created a major obstacle, blocking the recovery momentum of member countries of the European Union (EU). In that context, many support measures are actively implemented to create growth momentum for the economy.
Workers sit in front of a banner reading “Stop the inflation monster” as they strike for higher wages at the port in Hamburg, Germany, June 9, 2022. (Photo: Reuters)
Workers sit in front of a banner reading “Stop the inflation monster” as they strike for higher wages at the port in Hamburg, Germany, June 9, 2022. (Photo: Reuters)

Economic activity in the Eurozone continued to decline as the decrease in manufacturing spread to the service sector. The Eurozone's purchasing managers' index (PMI), compiled by Germany's Hamburg Commercial Bank, in collaboration with S&P Global, decreased from 48.6 in July, to 47 in August. This is the lowest PMI index in the last three years for the Eurozone.

PMI is considered an important measure reflecting the "health" of the economy. The economy is only recognised as growing when this index exceeds the threshold of 50 points. Therefore, the decreasing Eurozone PMI index increases concerns about the growth rate in the coming months.

President of the European Central Bank (ECB) Christine Lagarde admitted, that the Eurozone's short-term economic outlook has deteriorated significantly. High inflation and tight financial conditions are slowing spending.

The European Statistics Agency (Eurostat) said that the number of bankruptcy declarations in the EU in the second quarter of 2023, increased for the 6th consecutive quarter, reaching the highest level since Eurostat started compiling this data in 2015.

Accordingly, in the period from April to June, the number of companies ceasing operations increased by 8.4%, compared to the level of the first quarter. The number of bankruptcy filings increased in all fields, but the increase was much higher. The highest rates were recorded in the accommodation and catering services, transportation and warehousing, education, and health sectors.

Experts said that the main reason why many EU businesses go bankrupt is because the economy lacks growth momentum, as support packages during the COVID-19 pandemic have ended.

Persistent high inflation is also one of the cornerstones hindering the recovery of the European economy. To stop the price increase, from the summer of 2022 until now, the ECB has raised interest rates nine times, contributing to halving inflation in the Eurozone from a peak of 10.6%.

However, in a recent statement, ECB President Christine Lagarde stated, that although much progress has been made, the fight against inflation in the EU has not yet been won. Data recently released by Eurostat show that inflation in the Eurozone continued to remain at 5.3% in August, twice as much as the 2% target set by the ECB.

Lagarde affirmed that although on the surface inflation seems to be slowing down, risks still exist, and left open the possibility that the bank would raise interest rates for the 10th time at the next monetary policy meeting, on the 14th.

Analysts said that in the gloomy picture of the European economy, the German economy contributed many grey tones. The EU's leading country recorded 0% Gross Domestic Product (GDP) growth in the second quarter, after falling into a technical recession earlier this year.

Industry, a key growth engine for Germany, has been hit particularly hard in recent months, as exports have plummeted amid high inflation and a sluggish global economy. Ifo Economic Research Institute announced that Germany's business confidence index fell to 85.7 points in August, from 87.4 points in July.

Continual challenges are jostling the EU economy. However, many support measures are actively deployed to help the regional economic ship weather the storm.

The ruling coalition in Germany has just approved a 10-point plan to create momentum for the country's development, with special emphasis on the economic sector. One of the highlights of the plan is a tax reduction of 7 billion EUR per year for businesses, to support the economy, while creating a favourable business environment to attract investment.

In addition, Berlin also affirmed that it will promote digitalization to be a leader in the field of artificial intelligence, attracting a skilled workforce in the context that Germany lacks high-quality human resources in most fields. areas, speeding up the planning and licensing process for investment projects.

Besides Germany, many other EU member states also affirmed their determination to revive the economy. In a recent interview with Le Point magazine, French President Emmanuel Macron pledged to carry out important reforms to boost growth and reduce unemployment to 5%.

Besides the challenges of inflation and stagnant production, in the last months of 2023, the EU economy may continue to face many fluctuations, due to the impact of conflicts, climate change, and world economic decline. Analysts expected that drastic reforms by governments will soon be implemented, providing broader opportunities for recovery and growth in the region.