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Network News • 22-11-2022

How Europe can change the economic model to make it sustainable

Author: Lina Klesper - Legal Assistant PKF Malta
Published on Malta Independent: 22nd November 2022

The future of the current European economic model is challenged by the impacts of the pandemic crisis, Russia's war against Ukraine and not to forget the prevailing climate crisis. There have been calls for a more sustainable model of the European economy. Topical events and news paint a vivid picture of the current challenges the European economy is facing and show why it may be time to redesign the European economic model more than ever.

First, very present in the news is that big tech companies like Meta, Alphabet and Microsoft are now laying off thousands of jobs combined with a freeze in hiring for new corporate roles fuelling discussion about its short- and mid-term effects on the economy. Tech companies are indeed not immune to the slowing economy after many experienced growths and increased hiring during the Covid-19 pandemic due to the availability of cheap capital and increased demand for certain technologies. The reason behind tech companies struggling now is a perfect storm of inflation and lower demand for products and their dependence on revenue from advertising, which is unfortunate since marketing budgets tend to get cut first in uncertain times. Even though European tech companies, big and small, are also affected by the current fluctuations in the economy and tech layoffs, European employees are much better positioned with European and UK labour laws than in the US for example. It is not a question that they will reach the same level of productivity once the economy stabilizes. However, the question arises whether these layoffs are a bellwether for the rest of the economy.

A second issue is that bank interest rates for mortgages within the euro area are rising, already hitting a seven-year high in October after significantly rising since the beginning of 2022 following a historical low in 2021. Mortgage payments will rise for those on a variable-rate mortgage and higher borrowing costs need to be expected for new mortgages. Since cheap mortgages have been widely influencing the property market until now, the increasing costs of mortgages will have an impact on the euro area housing market, particularly house prices and housing investment as housing market dynamics are very sensitive to mortgage rates.

Therefore, the third issue is that speculations about the bursting of a low-end property bubble are circulating. After two years of continuous growth of property prices since July 2021, homeowners and investors are preparing themselves for a potentially painful correction as September was the first month without a rise. Some experts warn that houses in Europe are overvalued and that the market could cool off due to interest rate hikes. The effects of another housing market crash would be devastating for the wider economy. However, analysts remain positive that the bottom of the housing market will stay stable and housing price growth will just slow. But rising mortgages, lay-offs at major brokers and inflation eating away at home values in real terms are clearly marking bumps in the housing market.

As was already forecasted in 2021, the chip shortage is risking becoming a glut in 2023 due to a potential overcapacity following larger-scale capacity expansions, which is marking the fourth issue. As early as June this year a clear dearth to glut development was seen for certain computer chips like memory chips used in PCs and smartphones unfolding further with 2022 coming to an end. Forecasts in July described the automobile industry and hence auto chipmakers to be safe but since there has been a habit of hoarding chips and keeping them in warehouses, the situation will eventually worsen once companies stop ordering new chips. With the semiconductor industry being highly cyclical and demand expected to be relatively healthy, especially for more specialised chips and automotive chips, no major downturns are expected. However, investors fear that chip stocks will suffer the worst year ever as shortage-turned-glut effects spread.

Lastly, the overarching hardship Europe's markets are facing is Russia's invasion of Ukraine, which is intensifying inflation, high energy prices and slowing the economy, highly impacting energy and food markets urging EU countries to tackle rising prices and scarcity of supplies. Hence, EU member states have agreed to phase out the EU's dependence on Russian fossil fuels as soon as possible with a new regulation on gas storage and on reducing gas demand. Additionally, in October, a deal on new measures to address the high energy prices was also reached. Regarding the availability of food, feed and fertiliser, the EU is largely self-sufficient and with the common agricultural policy, the single market is expected to withhold the shocks. However, reduced imports from Ukraine have particularly impacted feed prices raising concern for affordability combined with inflationary trends.

All these issues describe the current climate for Europe's economy presenting heavy winds that are testing the steadiness and endurance of the European economic model. These issues also show that the EU generally has good policies installed and is quick to tackle current problems. But this can only be seen as being effective to a certain extent since dependencies on other countries and economies like Russia in light of the energy supply will continue to put stress on the European markets. Hence, there is a movement to change the European economic model to make it (more) sustainable and independent. The European Deal can be seen as the master plan on "how" to achieve this change. Proposals include making sustainable products the norm in the EU, boosting circular business models and empowering consumers for the green transition. With the objectives and vision behind the European Green Deal, it can be seen as the foundation for a new sustainable economic model. However, it cannot be said that these plans will prevent and remedy all that is affecting Europe's economy nor is it a panacea for all that is coming but it is a good way of strengthening Europe's economic model for the turbulent times ahead of us. 

Author: Lina Klesper - Legal Assistant PKF Malta
Published on Malta Independent: 22nd November 2022
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