"Suffered from their own restrictions": what is the reason for the deterioration of the situation in the European industry

The situation in European industry continues to deteriorate for nine consecutive months. This conclusion follows from the study published on Friday, March 24, by S&P Global.

According to the preliminary assessment of the agency, in March 2023, the index of business activity (PMI) in the manufacturing sector of the eurozone fell from 48.5 to 47.1 points. Moreover, since July 2022, the value has continuously remained below the critical mark of 50 points, which traditionally indicates the development of negative trends in the industry.

"In the industrial sector, there is a further reduction in the number of new orders, which means that current production volumes are maintained only by previously placed orders ... The overall inflation rate of production costs and sales prices remains high by historical standards. In fact, costs have risen again — at a rate not seen before the pandemic," the report said.

At the same time, the most noticeable weakening of activity was recorded in the industry of Germany, the largest economy in Europe. In the first month of spring, the production PMI of Germany fell from 46.3 to 44.4 points. The last time such a low level could be observed was in the summer of 2020, when the country faced the consequences of the coronavirus pandemic.

The observed dynamics indicate that company leaders are very skeptical about the future prospects for the development of the situation. This opinion was shared in a comment to RT by Vladimir Olenchenko, a senior researcher at the Center for European Studies of the IMEMO RAS.

"Business trusts the leadership of the countries where it is registered less and less. That is, the regulatory mechanism does not inspire optimism in companies, so the increase in output in such conditions is regarded by enterprises as a risk, "the specialist explained.

At the same time, high inflation creates additional difficulties for the work of business, the expert believes. According to him, if earlier people actively invested their savings in the securities of various companies, including industrial ones, then against the background of rising prices and rising living costs, the volume of these investments has significantly decreased.

At the same time, to curb inflation in Europe, rates are now being raised. As a result, borrowed money for enterprises is becoming less affordable, Olenchenko added.

Price overclocking

Inflation in the eurozone began to grow steadily in 2021 amid the pandemic crisis. Then quarantine restrictions led to interruptions in the supply of components, components, raw materials and materials, which eventually turned into an increase in the cost of products. At the same time, to support the region's economy, the European Central Bank (ECB) began to actively print money that was not sufficiently provided with goods.

In 2022, the situation was aggravated by Brussels' sanctions against Moscow. In particular, the rejection of Russian energy resources led to a shortage of energy raw materials in Europe and, as a result, a rush increase in hydrocarbon prices in the first half of the year.

The rise in the cost of energy turned into an even more serious increase in the cost of goods and services. Against this background, at a certain point, inflation in the eurozone rose to almost 11% - the highest value in history.

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Under the circumstances, the ECB decided to return to tightening monetary policy for the first time in a long time. Although earlier for a long period the regulator kept its interest rate near the zero mark, in 2022 its sharp increase began.

In total, over the past year, the European Central Bank has raised the base rate six times and brought it to 3.5% per annum. The achieved value was the highest since the global financial crisis of 2008.

It should be noted that traditionally the tightening of monetary policy is considered one of the main tools in the fight against rising prices. Due to the increase in interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which puts pressure on inflation.

According to Eurostat, against the background of the ECB's actions by March 2023, inflation in the eurozone slowed to 8.5%. Nevertheless, the indicator is still several times higher than the target level of the regulator of 2%.

"The fact is that the main reasons for the acceleration of inflation have not yet been eliminated. For example, the rise in energy prices is primarily due to the rejection of cheap gas from Russia and the transition to expensive LNG from the United States and other suppliers. At the same time, food prices remain high due to the crop failure of a number of crops, the lack of sown areas and the rise in price of mineral fertilizers, "Natalia Milchakova, a leading analyst at Freedom Finance Global, told RT.

Under these conditions, it is assumed that the ECB will continue to raise the interest rate. Thus, the business activity of European business may weaken even more, the expert does not exclude.

"Loans will become more expensive, primarily for small and medium-sized businesses. It will be more difficult to develop promising start-ups, including technological ones, and all this will reduce the competitiveness of European countries in the international market of high-tech products and services. It will be increasingly difficult for larger corporations to borrow cheaply in the bond market, which will increase the cost of debt servicing, "the RT interlocutor added.

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Heavy Loss

One of the challenges for many European companies was also the decision to leave Russia, experts say. Recall that in 2022, Western brands began to massively announce the curtailment of work in the Russian Federation after the start of a special military operation in Ukraine.

In parallel, the European Union banned the sale of almost half of its products to Moscow. So, after the introduction of ten packages of anti-Russian sanctions, today 49% of exports from the EU to the Russian Federation fall under the restrictions.

According to Vladimir Olenchenko, it may take enterprises from three to five years to replace the Russian market, so so far European countries are incurring serious losses from their actions. A similar point of view was expressed earlier in an interview with RT by the Minister of Finance of the Russian Federation Anton Siluanov.

"These states have suffered from their own restrictions on the supply of products to Russia. A number of foreign companies that previously worked with us and imported their goods to the Russian Federation are now forced to reduce production and lay off employees. This leads to a simple thesis: introducing restrictions, it is impossible not to feel them on yourself, "Siluanov emphasized.

Industrial Care

According to economists, certain concerns among the EU leadership today are caused by the transfer of a number of European industries to other jurisdictions, primarily in the United States. Although the transfer of business to the States is not yet massive, the trend is beginning to gradually gain momentum, said Vladimir Olenchenko.

"A lot depends on the industries. For example, the German company BASF (was a world leader in the chemical industry) for many years used cheap natural gas from Russia as a raw material. After the sabotage at Nord Streams, the organization was first forced to reduce production, and then think about transferring it to other countries, where it will have access to relatively inexpensive energy, "the specialist said.

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Moreover, in 2022, the United States approved the law "On Reducing Inflation". The document suggests the allocation of about $ 400 billion to finance the energy transition in the country over the next ten years. In particular, Washington plans to provide significant subsidies to manufacturers of electric vehicles, batteries and energy equipment, provided that they are produced in the United States.

The American initiative has unleashed a sharp reaction from the EU authorities. For example, French President Emmanuel Macron announced the possible deindustrialization of Europe as a result of US actions. In turn, the head of the European Commission, Ursula von der Leyen, warned of the threat of a new trade war with Washington.

"The EU will respond to this law in an adequate and carefully balanced manner ... This law can lead to unfair competition, the closure of markets and the disruption of critical supply chains, "TASS quoted von der Leyen as saying.

According to Natalia Milchakova, taking into account the current circumstances, European corporations will continue to gradually transfer production to other regions of the world. For the European Union itself, this may threaten both a slowdown in economic growth and the loss of the status of one of the largest international financial centers. A similar position is shared by Vladimir Olenchenko.

"European goods have already become more expensive and are losing their competitive advantages in world markets. Obviously, American and British manufacturers benefit from this. This state of affairs only weakens the EU and deprives it of its authority," the expert concluded.