Clouds of recession in Europe increase risks for economy, banks

With the war in Ukraine continuing for a third month, and with no hint of when it will end and what the next day will bring for Europe, estimates or rather expectations of a relatively quick end to the conflict and a gradual easing of the crisis are weakening.

As Western-Russian relations have come to a standstill, the situation is bleak for the coming months: if the war continues, energy efficiency issues will worsen in autumn, and several major European economies will slide into recession.

In addition to the complicated issue of high prices and inflation, yet another problem is emerging, the possibility of a food crisis in 2023, which will intensify inflationary pressures and may cause a humanitarian crisis in certain African countries.

The prospect of recession in central European countries- with Germany being the first one- after the first half of 2022, is considered inevitable. There is already a significant slowdown in European economies. Southern European countries appear to be in a better position at the moment, mainly due to tourism. However, it won’t be long before the effects of the recession on the major European countries spread to the south.

The spectre of inflation, as well as the imminent slowdown in European economies create difficult choices for the European Central Bank in terms of interest rates. The ECB will have to choose between growth and monetary stability, at a time that inflationary pressures (energy prices and many agricultural products) are largely due to geopolitical developments and uncertainties rather than excessive demand.

Concerns for banks, businesses in Greece

In 2022, it is more or less a given that the Greek economy will remain on a growth trajectory, however, the situation is extremely fragile. With the fiscal situation at a breaking point, debt at very high levels and competitiveness problems largely persisting, changes in the global economy and markets may rekindle market fears and concern about Greece's course.

Banks appeared optimistic while announcing first quarter results, however, those estimates weaken as time goes by. Also, as far as businesses are concerned, a significant reduction in consumption is expected in the second half of the year, which in combination with increased operating costs will have a great impact on their profitability.

Political uncertainty returns

With Europe’s severe current issues and time counting down for the next national elections, which will take place no later than May 2023, political uncertainty is returning to the country.

What will be the impact on the electoral influence of New Democracy and Prime Minister Kyriakos Mitsotakis if a second winter of energy crisis and high prices follows? Concerns are running high about the outcome of the election, the risk of a series of elections, and whether an autonomous government or a strong coalition government will be formed. At the same time, the acquisition of investment grade before the elections and the formation of a strong government is considered unlikely.

In this context, analysts believe that Mitsotakis understands very well the difficulties and dangers of the international environment, and the damage that a second winter of high prices will cause, and that he begins to see the need for immediate recourse to the polls in order to clear the political scene as soon as possible.

The Prime Minister's contacts today, Tuesday, and tomorrow in Davos, Switzerland, where he will participate in the World Economic Forum, will help him get a good grasp on the outlook for the European and global economy and the energy crisis in the coming months, and will determine whether he resorts to early elections immediately after the summer.