Europe in crisis.

In this episode, Luke and Paul discuss the many challenges facing Europe at the moment, including: inflation, recession, energy prices, political uncertainty, and monetary policy tightening. 

 The key takeaways are

 ·         Consumer sentiment in the Eurozone is at all-time lows. While these surveys probably overstate the degree of economic weakness, this kind of sentiment deterioration cannot help but have some impact on people’s spending patterns and so the economic outlook. Near term recession risks are therefore highly elevated.

·         Going into the winter, Europe faces an even more challenging economic environment, with Russian gas supplies to Europe likely to be highly restricted even in the best case scenario. In the worst case scenario, where Russian gas supplies are largely turned off, the continent would face severe energy rationing for firms causing a recession this year.

·         The collapse of the Italian government partly reflects the strains that high inflation and economic weakness are putting on political systems across the world. A governing coalition of right leaning parties looks to be the most likely outcome of elections later this year, which could further complicate Italy’s access to EU support measures.

·         The European Central Bank’s Transmission Protection Instrument should help support various sovereign debt markets through this tightening cycle. However, it may be less useful in dealing with spread widening caused by domestic political uncertainty.

·         The ECB is likely to deliver several more 50bps rate increases over the next few months. However, the Eurozone economy is heading for recession sooner or later, which means rate hikes will likely go into reverse at some point next year.