Three challenges for Europe in 2023
Europe faces a triple challenge for 2023, avoiding recession, defending the euro and not fueling political turbulence. Markets will welcome an adequate response.
The energy shock continues to make waves in Europe. While oil prices almost returned to January levels at the end of last year, and gas and electricity prices enjoyed very mild temperatures from mid-December to the end of the year, concerns remain.
After years of energy investment and continued tensions with Russia, the questions have not gone away. Even if at the beginning of the year the prospect of energy shortages seemed to have diminished, not forgetting the fragility of the electricity generation system in France, the increased strain on the grid following European decisions on the massive and very rapid electrification of the car fleet. Fierce competition for liquefied natural gas with Asia and a fully renewable China promises to be fierce, which will continue to keep energy shortages at bay from next winter.
This tense context constantly weakens the European industrial structure and, above all, Germany, the economic engine of the Union. Our Economic Momentum MMS indicator is displayed there 22, near the 2011 low. So should we fear that the undeniable slowdown in activity will turn into a deep recession? Avoiding such a scenario is the Union’s first challenge for 2023.
Our German Economic Growth Momentum indicator fell to 23 in 2020 and rose to 82 in 2021. Currently, he is about 22.
Source: Bloomberg / Montpensier Finance as of December 30, 2022
Three things can help. First, the Chinese revival. Given the short-term impact of CoVid on the population, even if it is gradual, the first elements look reassuring and should restore the positive dynamics of demand, which is important for European exporters.
Then, the return of budgetary flexibility to the Union Germany’s deficit forecasts for this year indicate that it could reach 3.25% to 4.5% of GDP, depending on the amount of spending needed to regulate gas and electricity prices.
Finally, a break in monetary tightening, which has been strongly implemented by the ECB since July, will be needed Relieve pressure and avoid real estate crisis due to significant debt accumulation since 2008.
In general, the Frankfurt institute is at the heart of the second problem facing the Old Continent for knows how to get out “ Bermuda triangle » myethe silence that threatens him : to respect the mandate to fight inflation without exacerbating the economic slowdown and, above all, to protect the euro, both to maintain its credibility as a strong currency of the international financial system and to avoid exacerbating the already growing rifts between north and south. countries.
For this, the ECB will have to return to a more balanced course than its recent decisions, only due to the determination to see inflation indices in the Eurozone return to their historical target of 2% as soon as possible. However, these can only be lagging indicators, the results of the past economic context and monetary and budget decisions made several months ago.
The tightening of the monetary environment in the euro zone is already ongoing awesome like us MMS indicator of monetary conditions. Adding to the gradual withdrawal of the ECB, which plans to reduce the purchase of securities in the market by 15 billion euros per month from the second quarter, the planned 2023 government issuance of about 1,200 billion could be the subject of tough negotiations. investors.
Our MMS indicator of euro zone monetary conditions It fell to 57 2020 and returned to 82 in 2021. It swings around 40 at the moment.
Source: Bloomberg / Montpensier Finance as of December 30, 2022
Therefore, it is useless to add additional complications by focusing more on the availability and cost of credit, especially for the southern countries of the Frankfurt institute: the Italian spread is not too far from the already considered limit of 250 bps. consolidation of the region as a warning signal for investors.
These centrifugal financial forces are also a manifestation of political tensions, the easing of which constitutes the third and perhaps most important European challenge this year.
The energy crisis of 2022 has indeed deepened existing riftsbetween “thrifty” and “thrifty” countries, but also, above all, created new countries depending on the position of national executives and citizens in relation to the conflict in Eastern Europe.
The so-called Visegrad group in Eastern Europe and on the front lines of the war thus completely collapsed between Poland, the Czech Republic and, to a lesser extent, Slovakia. Ahead of sanctions against Hungary, which is eager to further flatter Russia and its big Slavic neighbor.
Strong disagreements have arisen within the countries that created the union. Germany, heavily dependent on Russian gas, wants to go it alone both in negotiations with alternative suppliers and in plans to protect its industry. Initially less vulnerable, France is vulnerable due to the continued unavailability of its nuclear fleet. Italy is weakened by the historic weight of its debt, which puts it under pressure from the ECB and markets. Even the Netherlands stands out by slowing initiatives to revise electricity pricing mechanisms indexed to gas prices.
Faced with this situation, Europe will have to rediscover its sense of unity and future. When events challenged him and crises were often decisive forces, he always managed to move forward. Barring geopolitical volatility or the ECB’s previous Bundesbank inflexibility, current market valuations could attract investors.
Happy New Yearee for all !
