LONDON, Oct. 13 (Xinhua) — Multiple uncertainties facing the European economy caused by the energy crisis, supply chain disruption and disputes over support measures would push some businesses away from the region and could undermine the economy, an expert has said.
“Obviously businesses dislike uncertainty,” Charlie Cai, a professor of finance at the University of Liverpool, told Xinhua recently. Cai said the European energy crisis started even before the Russia-Ukraine conflict, combined with the high cost of living pushed up by COVID-19. “These are now the two key things at the moment.” The European Union has prioritized stabilizing energy prices this winter, but disagreement followed over the support measures among the member states. The short-term uncertainty has pushed some businesses away, especially energy-hungry ones, Cai told Xinhua.
It remains to be seen whether governments can stabilize prices. “Nobody knows, and this is a risk,” he noted.
With different support packages from governments comes uncertainty on whether businesses can benefit from some kind of price cap. Cai said business leaders need to make a swift decision on whether to hedge.
“My personal sense is it’s probably going to get worse before getting better. So some of the deals may now look not favorable,” but that could change in a few months.
A Wall Street Journal article recently reported that high natural-gas prices have pushed some European manufacturers to the United States.
“That wouldn’t surprise me given the heightened uncertainty of energy security, and because of the post-COVID supply chain destruction, a lot of manufacturers start rethinking their supply chain structure,” Cai said.
Cai said that the United States has created more manufacturing and green investment opportunities.
“Some businesses look at what’s on offer, and it looks more favorable.” But the outflow of businesses is bad news for the European economy, said the expert.
“It means less investment and employment in the short term.” “In the much longer term, when companies move away, it would change the structures of the supply chain. That will affect quite a lot of companies,” he said. He noted that a departure from Europe would hit supply chain security and efficiency, along with innovation.
“Europe may potentially, gradually lose its advantage in advanced manufacturing if more and more of them move away. The innovation would not happen there, and that kind of help and cluster effect will disappear.” But these were still early days, Cai stressed.
“To understand how serious this situation is, we need more data. Companies cannot move their production overnight. We need to see more evidence to enable us to understand the full picture.”
Thinking about the whole supply chain is the key to choosing where to produce. In many cases, he said that companies are present in both the U.S. and European markets, noting that there would be no sudden outflow because the demand and supply of material and labor cannot suddenly appear.
Nevertheless, Cai said that the uncertainties in Europe are pushing some businesses away. Speaking of the risks, Cai said the primary concern in Europe was high inflation intertwined with high interest rates. “Both of these two are connecting to each other in some way that is hurting the businesses in terms of how they operate.”
With a strong U.S. dollar, prices of commodities like energy have risen, dealing a severe blow to importers, Cai said. Worse yet, the United States could still hike interest rates higher; if Europe follows, borrowing costs will rise, impacting economic growth.
“Businesses may previously think some investment projects were viable, but now they’re not. And they thought some contracts they received were profitable, but now they’re not. It means more and more default, and this is going to hit the banks’ balance sheet,” he noted.
On top of that, pay disputes amid high inflation have led to strikes across Europe, and the walkouts could push up inflation in turn, he said, noting that this would cause economic instability and social unrest because high inflation hits lower-income groups harder.
