The Economist compares how well EU countries are prepared for the future. The winners are Ireland, Malte, Cyprus, Luxembourg and Denmark.
The European economy is poised for a challenging period ahead, with Germany likely entering a recession. The European Commission predicts sluggish growth of just 0.8% for the EU in 2023 and a similar outlook for 2024. Inflation rates are decreasing at a slow pace, prompting the European Central Bank (ECB) to implement further rate hikes in September. Business confidence is on a declining trend, necessitating urgent measures to bolster Europe’s economic resilience. The Commission has enlisted the expertise of former ECB chief, Mario Draghi, to devise a comprehensive strategy for economic strengthening, potentially culminating in a publication titled “Whatever it Takes (to Grow)”.
However, not all European countries are equally affected. They vary in performance across five pivotal challenges: managing demand to combat inflation, addressing demographic shifts, coping with mounting debt, navigating the transition to a greener economy, and disentangling from autocratic regimes.
The ECB faces a dilemma in setting interest rates, as inflation rates diverge significantly among EU countries. Austria grapples with 5.8% inflation, while Greece nears the ECB’s 2% target at 2.4%. This discrepancy could lead to some countries facing excessively high rates, while others find them too low, potentially requiring costly adjustments.
Debt servicing costs are poised to impact countries differently, particularly those with high existing debt. Tax havens like Ireland see minimal local impact despite high corporate debt, while Hungary, Scandinavia, and the Netherlands are likely to experience a drag on consumption and investment due to private debt.
Demographic challenges loom large, with aging populations affecting labor markets. Successful countries stabilize birth rates, embrace immigration, encourage longer working lives, and promote gender-balanced care responsibilities to unleash women’s full economic potential.
In the pursuit of decarbonization, investment in green technologies is crucial. While transport and heating show promise, industry faces fiercer competition. Moreover, Europe’s interconnected power markets mean that industry costs remain high even in countries with abundant renewable resources.
Lastly, all EU members confront the need to disengage from autocratic nations, with a careful reevaluation of relations with China being paramount. Germany and its major industries, particularly automakers, stand to be most affected, but all countries face supply chain risks.