Is history repeating itself in Europe? Is Europe going to experience Great Depression 2.0?
Time is running out, and the temporary relief of lower gas prices may give Europeans a false sense of security that they have avoided a potential economic disaster. In reality, this is far from the truth. Just when the world thought that two years of pandemic madness wasn’t enough to wreak havoc, last year, Europe jumped into a war that could have been averted. The Russia-Ukraine war has undoubtedly taken a severe toll on global economies, with Europe being the most chaotic.
The Covid-19 pandemic and the ongoing war in Ukraine have had a significant and far-reaching impact on the European economies. The war has caused considerable disruption to cross-border trade and investments, leading to a sharp decline in economic activity in many of the countries involved. At the same time, the pandemic has led to a drop in consumer demand and investment, further weakening the already fragile economies of some European nations. To make matters worse, an energy crisis also erupted.
In 2022, Europe struggled to contain an energy crisis fearing potential blackouts, shutting down factories and a deep recession. Russia slashed all of the continent’s access to the cheap natural gas that was previously used to run factories, produce electricity, and heat homes. This triggered a desperate search for new supplies on the part of European governments. Europe has successfully overcome the energy shortage, thank goodness. But the threat of an unexpected recession is still very real. The catastrophe is still looming at large, despite ongoing efforts to reduce the likelihood of a recession, bankruptcies, and economic repercussions.
The wave of bankruptcies
European companies are falling like a deck of cards. While announcing the statistics of the 4th quarter of 2022, European Commission has announced that the number of bankruptcy filings in the EU is at its highest since 2015. Reportedly, the number of bankruptcy declarations among EU businesses has increased tremendously in the fourth quarter of 2022 and has reached the highest levels since the start of data collection in 2015.
This is reported, as a 27% increase since the last quarter. When it comes to the registration of new businesses, Europeans are also finding it hard to establish new businesses. A mere 0.2% of new businesses were registered in Europe during the fourth quarter of 2022. This information comes from data on business registrations and bankruptcies published by Eurostat today, which the countries transmit monthly on a voluntary basis. The Eurostat database also includes monthly data on business registrations and bankruptcies.
As per economists, the bankruptcies, which come after two years of declining insolvencies across Europe, reflect worsening business conditions for many European companies due to sluggish economic growth, skyrocketing energy prices, rising wages, and higher financing costs. Ludovic Subran, the chief economist at German insurer Allianz, predicted a rise of almost 20% in bankruptcy filings in western Europe for this year. “There are a lot of companies that were given a free pass during all of 2020 and 2021 when they didn’t even have to pay some of their creditors, such as social charges in France,” He added, “These fallen angels or businesses are now barely making it, the government is not giving any support, with increased financing and wage costs, and it is becoming totally untenable,” The countrywide statistics are more alarming.
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Juggernauts failing
Bankruptcies in Sweden soared for the seventh consecutive month in February amid declining household consumption and growing pressure on construction companies from an ongoing housing-market crunch, Bloomberg has reported this week. In February, the largest Swedish company that declared bankruptcy was air carrier ‘Air Leap’, with annual sales of 278 million kronor ($27 million), Bloomberg said, citing Creditsafe.
The Swedish government announced at the end of 2022, that the country was entering a recession which would last until 2025. According to market research company GraydonCreditsafe, the number of bankruptcies in Belgium have also increased by 44% from 1 in 217 businesses in 2021 to 1 in 151 last year. In Brussels, where 1 in 101 people declared themselves insolvent in 2022, the bankruptcy rate was particularly high. The bankruptcy rate was 1 in 158 in Flanders and 1 in 176 in Wallonia.
Additionally, there has been a dramatic increase in Spanish bankruptcy filings. According to reports, the number of court filings for corporate bankruptcy, increased more than double in the second half of last year, as a result of changes in the nation’s insolvency law, that made it simpler for businesses to restructure their debt.
After the government discontinued many pandemic relief measures, there was an almost 16% jump in French bankruptcy filings in the second half of last year. For 1st time since the 2009 economic crisis, corporate bankruptcies in Germany are also on the rise. More than 14,700 corporate bankruptcies are expected in Germany this year. In 2021, there were 13,993 cases of corporate insolvency in Germany, the lowest figure since the introduction of the current insolvency code in 1999.
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What to blame?
Well, a lot of experts around the world are giving a variety of explanations, including the end of government assistance and post-pandemic recoveries. Whatever the cause of the rise in bankruptcies, an analysis of the data available strongly suggests that the energy crisis and Russia’s full-scale invasion of Ukraine in February last year were the only events that turned Europe into a wasteland.
As a result, the EU imposed a number of sanctions on Russian industry and energy supplies. In response, Moscow cut off its energy supply to Europe, which drove up energy prices. This brought about a sharp decline in European economic growth, which had a negative effect on businesses and people in general and caused a rise in bankruptcies. So it would not be wrong to infer that sanctions have indeed backfired, with Europe falling in the very pit it dug for Russia.
Apart from this, the global economic recession and the withdrawal of government support for ailing businesses also played a role in the surge in bankruptcies.
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Terrible things might unfold soon
If the European Union doesn’t adequately address the issue, many experts in Europe are predicting a situation akin to the Great Depression of 1929. This risk has not developed as a result of a bad budget planning by an inept government or even as a result of some miscalculated speculation occurring in the financial markets.
Instead, it has developed as a result of the world’s economic relations deteriorating just because of a small war that is now escalating out of proportion. Thanks to the myopic vision of European leaders who chose to enter the Ukraine war, when it would have been much wiser for them to stay out. We can only hope that things don’t turn out as bad as expected.
