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 mention the current climate crisis. Calls have been made for a more sustainable model of the European economy. Current events and news paint a vivid picture of the current challenges facing Europe’s economy and show why it is perhaps more than ever time to rethink Europe’s economic model.
First, very much in the news, big tech companies like Meta, Alphabet and Microsoft are now laying off thousands of jobs, combined with a hiring freeze for new roles in the company, fueling discussion about its short and medium term effects on the economy. Tech companies are indeed not immune to the downturn in the 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 tech companies are struggling right now is a perfect storm of inflation and declining demand for products and their dependence on advertising revenue, which is unfortunate because marketing budgets tend to get cut first in period of uncertainty. Even though European tech companies, large and small, are equally affected by the current fluctuations in the economy and tech layoffs, European employees are much better off with European and UK labor laws than in the US for example. . There is no question of them reaching the same level of productivity once the economy stabilizes. However, the question arises whether these layoffs are an indicator for the rest of the economy.
A second issue is that bank interest rates for mortgages in the Eurozone are rising, already hitting a seven-year high in October after rising significantly since the start of 2022 from a historic low in 2021. Mortgage payments will rise for those who benefit from a variable rate. -higher mortgage rates and borrowing costs are to be expected for new mortgages. Since cheap mortgages have largely influenced the real estate market so far, the increase in mortgage costs will have an impact on the euro area housing market, in particular on house prices and the real estate investment, as the dynamics of the housing market are very sensitive to mortgage rates.
Therefore, the third problem is that speculations about the bursting of a low-end real estate bubble are circulating. After two years of continuous house price growth since July 2021, homeowners and investors are bracing for a potentially painful correction as September was the first month without a rise. Some experts are warning that homes in Europe are overvalued and the market could cool due to interest rate hikes. The effects of another housing market crash would be devastating for the entire economy. However, analysts remain confident that the bottom of the housing market will remain stable and growth in house prices will slow. But rising mortgages, layoffs at major brokers and inflation eating away at home values in real terms are clearly marking bumps in the housing market.
As already predicted in 2021, the chip shortage risks becoming a glut in 2023 due to potential overcapacity following larger-scale capacity expansions, which marks the fourth problem. As early as June this year, a clear shortage of glut development was seen for some computer chips, such as memory chips used in PCs and smartphones, continuing through the end of 2022. The July forecast described the auto industry and therefore auto chip makers as safe, but since there has been a habit of hoarding chips and keeping them in warehouses, the situation will eventually get worse once companies stop order new chips. With the semiconductor industry being highly cyclical and demand expected to be relatively healthy, especially for more specialized chips and automotive chips, no major slowdown is expected. However, investors fear chip stocks may suffer their worst year ever as the scarcity effects spread.
Finally, the biggest challenge facing European markets is Russia’s invasion of Ukraine, which is intensifying inflation, high energy prices and slowing the economy, all of which have a huge impact on energy and food markets, prompting EU countries to tackle rising prices and scarce supplies. Therefore, EU member states have agreed to phase out the EU’s dependence on Russian fossil fuels as soon as possible with a new gas storage and demand reduction regulation. gas. Moreover, in October, an agreement on new measures to deal with high energy prices was also reached. When it comes to the availability of food, feed and fertilisers, the EU is largely self-sufficient and, thanks to the common agricultural policy, the single market should absorb shocks. However, reduced imports from Ukraine have had a particular impact on feed prices, raising affordability concerns, combined with inflationary trends.
All these questions describe the current climate of the European economy presenting strong winds which test the stability and the endurance of the European economic model. These questions also show that the EU generally has good policies in place and is addressing current issues quickly. But this can only be considered effective to a certain extent since dependencies on other countries and economies like Russia for energy supplies will continue to weigh on European markets. There is therefore a movement to change the European economic model to make it (more) sustainable and independent. The European agreement can be seen as the blueprint 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. Together with the objectives and the vision that underpin the European Green Deal, it can be seen as the foundation of a new sustainable economic model. However, it cannot be said that these plans will prevent and remedy everything that affects the European economy nor are they a panacea for everything that is to come, but it is a good way to strengthen the model European economy for the turbulent times ahead.