Europe’s Home-Made Crisis

The European continent is heading for a home-made crisis which has only shown the beginnings until now, and the European Union has been digging its own trenches and pitfalls a lot deeper in the past years.

With a market share of 44% in LNG imports coming from Russia, the EU has placed itself at the mercy of a supplier which it also confronts with sanctions at a multitude of levels. Oh dear, LNG prices are soaring and that drives up prices of almost everything else. Its drive to eliminate fossil fuels as main source of energy hasn’t really left the stage of slogans, speeches, showcases and pilots, and continues to be a topic of debate as if there is still a lot of time to finally start the big push. Unfortunately, the soaring energy costs will eat a big chunk of the budgets that might have been allocated to create the required infrastructure for renewable sustainable energy across the European Union. And let the record show that most EU member states would sit on a significant budget gap without the taxes on fossil fuels…

When Trump launched his ‘easy to win’ trade war on China, the European Union assumed the role of passive bystander. Embargos and sanctions polluted the economy and before we knew it China’s fastest growing driver behind its economy was hit from all directions: tech! The first signs of the microchip crisis were visible like the billboards on Times Square when Trump imposed his embargo regime on everything coming from China, everyone buying from China, and everyone supplying China’s semiconductor industry. And while the semiconductor / microchip crisis further escalated, the European Union acted like a deer caught in the headlights of an approaching car… Even when Dutch and German semiconductor technology leaders were impacted by the sanctions and embargos, the EU remained silent. Late summer 2021, the European Union finally came up with a strategy paper which might lead to some solutions in a couple of years…

The COVID19 pandemic demonstrated what the EU is capable of when working as the economic power block it is, and its enormous strength and resilience when solidarity outweighs political agendas, and what can go wrong when it doesn’t. The controlled vaccination push is impressive. Managing the procurement and distribution of PPE despite all challenges is at least as impressive. But far more impressive than any of such examples is how countries supported the hardest hit member states with their available healthcare capacities. But then politics and the Big Divide kicked in again. Instead of focusing on solidarity and economic recovery, member states prefer to battle over details and jurisdiction, and taking the British approach of wanting the benefits but not the consequences of being a member of the largest economic block worldwide.

The impact of these long chains of weak leadership and The Big Divide is shown very directly in Europe’s automotive industry. Inflation is growing and economic growth is below the already lowered expectations. This always leads to lower volumes for the automotive industry, especially in the mid-sector where the combination of volume and margins are optimal. The semiconductor crisis leads to very low supply of the many microchips needed for the modern cars, and that drives prices of all thinkable components up. Energy prices are soaring and that impacts the energy demanding manufacturing processes even harder than the exploding costs of the few microchips which are available.

Most of the soaring costs will be transferred to the customers, as always, but there is a much bigger impact that will strike in the coming months, or even weeks. Most pandemic economic support packages have ended and the funds to back these up are depleted. Automotive suppliers have already started to slowdown production, and some have even suspended production completely. This will lead to massive layoffs in the supplier segment at first, and with the car manufacturers not much later. Hundreds of thousands of people in the automotive sector will lose their jobs in an economy where inflation grows, and the cost of living is exploding due to soaring energy prices and shortages.

The automotive sector is just one example of the many industries in which the passiveness of the European Union will be felt, but it is the sector where the impact is expected to be the biggest. Because there are almost 14 million jobs, which represents more than 6% of the total employment in the European Union. Besides its contribution of 7% of the total GDP, it is also the sector with the largest private investments in research and development. On top of that all, the automotive sector also has the biggest multiplier effect on other industries within the European Union. So, whatever happens to this important sector of the economy has significant impact on many other segments. And with that, it also demonstrates that the EU should have done a much better job!