These 4 economic challenges threaten the future of Europe

21 November 2023 - 13:00

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The old continent must overcome 4 challenges before they hamper its growth. The European economy is in the balance more than ever in this critical global context.

These 4 economic challenges threaten the future of Europe

The European economy is grappling with 4 critical challenges that can turn into profound and prolonged problems for its growth.

From the fight against inflation by the ECB to the need to speed up the energy transition, up to the demographic decline that can upset the world of work and state budgets and deglobalization, the risks of shock are real for Europe.

The moment is critical and requires far-sighted, effective, community-based political responses. ECB governor Christine Lagarde, in a speech on November 17, urged the old continent to make a “generational effort” that can save its uncertain destiny. In the background, there are 4 challenges to overcome if Europe wants to focus on growth, innovation, and sustainability.

1. Inflation and growth: will the ECB win the battle on rates?

The first important challenge for the European economy is undoubtedly aimed at the monetary policy of the ECB: is it working in the fight against inflation? Will it be able to avoid a recession?

The answers are not yet clear. The latest data on consumer prices from the Eurozone help to understand why the picture is complex. Increasing prices of services and food was the main driver of inflation growth in October, according to data published on Friday, while the EU statistics office confirmed that year-on-year inflation continues to sharply slow down.

Eurostat said consumer inflation in the 20 countries that use the euro fell to 2.9% year-on-year in October from 4.3% in September after prices rose 0.1% on a monthly basis.

Price increases in the services sector, the largest part of the eurozone economy, added 1.97 percentage points to the final year-on-year figure, and more expensive food, alcohol, and tobacco products led to 1.48 points more percentages.

Falling energy costs continued to push inflation down. The ECB’s bet now is to hit the 2% target without dragging the bloc into recession. It won’t be that easy and it is no coincidence that the markets are starting to focus on rate cuts of an entire percentage point in 2024.

2. Energy transition

At the European Banking Congress on Friday 17 November, Lagarde expressed concern about the global economy, which is increasingly fragmented into opposing blocs.

In this very precarious scenario, one of the major challenges for Europe is to ride the energy transition without this productive and industrial change overwhelming its finances. With China now dominating the renewable energy and electric vehicle sectors, even threatening to explode a green bubble due to excess supply at low prices, the old continent cannot wait any longer. But what price can you pay to support the green industry?

The answer raises an alarm bell. According to Lagarde, estimates show that the planned green transition in Europe will require an additional investment of 620 billion euros every year until the end of the decade, with another 125 billion euros per year for a digital transition.

Governments have the highest debt levels since World War II, and European recovery funding will end in 2026. Banks will have a central role to play, but we cannot expect them to take on so much risk in their balance sheets”, she added, drawing attention to the proposed Capital Markets Union (CMU).

In summary, the challenge is twofold for Europe: the energy transition and the solidity of investments, without weighing down already worrying debt levels.

3. Population decline

Demography has become a crucial issue for Europe: the bloc is aging.

As our societies age, we will need to implement new technologies so we can produce more results with fewer workers. Digitalization will help”, urged Lagarde.

This is a strategic revolution, for which states must begin to equip themselves. Foresight in this area is key. To address the demographic gap, Europe should also rethink migration policies more wisely.

In fact, a larger elderly population does not just mean a smaller workforce. Public coffers will also be revolutionized: more money will be needed for pensions and health care in exchange for fewer contributions from workers paid.

4. Deglobalization

The war in Ukraine that broke out with Russia’s invasion has changed energy supplies forever and China-US tension is revolutionizing global trade. Europe itself is called to rethink its network of partners, while the world divides into blocs and geopolitics becomes a risk to be calculated.

According to Lagarde, “as new trade barriers appear, we will have to reevaluate supply chains and invest in new ones that are safer, more efficient and closer to home”.

The exclusion of Russia as a gas supplier was the first step towards an epochal change in the European energy sector. Crucial raw materials such as lithium, rare earths, and copper are needed for the energy transition. Combining industrial and development interests with good democratic and political practices is imperative for the future of the European Union.

Original article published on Italy 2023-11-17 12:42:15. Original title: I 4 problemi economici che minacciano l’Europa

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