The plight of the Small and Medium-sized Enterprises (SMEs), which compose the basis of Europe’s economy, is worse than ever. The SMEs of the Euro area are facing significant financial difficulties, according to 24% of them in the first half of 2023. These were mainly caused by the global economy and lack of public confidence in foreign funding. Corporate borrowing costs have jumped in the past year after a long time of lower or stagnant interest rates, the borrowing cost gauge peaked at 4.99% in August 2023, its highest level since 2008. This sharp increase in the borrowing cost caused corporate lending activity to drop precipitously during 2022 and 2023.

These economic issues have just as many social ramifications. Income inequality and social unrest rise in those areas most hit by the closing of firms and loss of employment. There are several hypotheses as to why early unemployment is ‘disastrous’. Longer periods of youth unemployment can lead to loss of skills and work experience, which makes people unable to compete on the labour market. Intense early career layoffs in particular can make employers suspicious of and/or suspicious of prolonged absence. These all help make early work experience so important for long-term employment. The possibility of a “scarring effect” on the young people who enter the labour market in this timeframe is even more troubling, according to recent studies by the Youth Futures Foundation (2024).

Governments, both at the national and EU levels, have taken different steps to deal with these difficulties. The €750 billion allocation of the NextGenerationEU recovery fund is the largest ever European economic support programme. But it is unclear whether or not these interventions are working and when, especially in reaching the most underserved sectors and regions.

In this essay, Europe’s complex economic problems are detailed on three levels. It first reviews the structural and cyclical factors behind the rising unemployment and corporate bankruptcy rates in the region. Second, it considers how well interventions of policy already taking place have succeeded in addressing such problems, and examines interventions at the national as well as the EU level. Last, it looks at what these economic challenges might mean for Europe’s long-term economic competitiveness in the global economy and its internal social stability more generally. Through this multiple interpretation, the paper tries to give an all-round overview of the current and future economic situation.

The European labour market remains difficult in 2024: the Eurostat data indicates an average EU unemployment rate of 6.5%. This number is low in historical terms, but it conceals large regional differences and structural inefficiencies within certain demographic categories and industries.

And in southern Europe, Spain and Greece especially, unemployment remains at a record-high rate of more than 10%. These higher numbers reflect structural weaknesses in these labour markets that have been present for some time – like stringent employment laws and a lack of alignment between worker talent and market demand. This is all the more troubling since these rates have remained elevated despite various policy measures at national and EU levels.

Youth unemployment is among the most urgent problems in the European labour market. In Italy and France youth unemployment is approaching 20% and even more, an era of “lost generation” risks with long-term ramifications for economic development and society. Young workers – especially those with minimal education or work experience – are particularly hard-pressed to get jobs, and are often stuck in contract or unstable jobs.

Unemployment effects have been disproportionate across industries, according to sectoral analysis. Particularly impacted have been manufacturing industries, where old industries had been unable to keep up with technological advancement and global competition. Tourism industry, despite some recovery from the pandemic, remains hit by job gaps. Services, an EU big employer, has seen the biggest changes in the employment landscape, with some sub sectors growing and others shrinking.

Corporate bankruptcies in the EU are soaring to record highs, increasing by 14% compared to pre-pandemic numbers. This pattern shows that even with the many relief measures that were put in place after the pandemic, many companies are finding it difficult to adjust to the new economic reality.

Sweden and Germany – long the home of the strongest economies in Europe – experienced historic bankruptcy levels, especially for SMEs. This is all the more concerning as SMEs are the backbone of the European economy: they comprise around 99% of all enterprises and two thirds of private sector jobs. Its reality in these nations should give a red flag to the other EU members.

Energy-intensive industries were the worst of the bankruptcy wave because of continued high energy prices and difficulties moving to more sustainable activities. Chemicals, steel mills, heavy industry, and a lot of other companies could not keep their profitability going when operating costs escalated and environmental laws became more strict.

Retail is another area where bankruptcies have surged with the structural shifts of consumers’ habits as well as the digital transformation of business. Brick-and-mortar stores have also been at the mercy of the weakest link as not many could get past the rise of online retailers.

Bankruptcies vary significantly by region and some regions suffer most. Bankruptcy rates in cities containing large numbers of retailers and service firms are more than normal, and places with high amounts of traditional manufacturing have also fallen most heavily.

Unemployment and the rise of corporate bankruptcies combined are an enormous challenge for European politicians. These are trends that don’t just reflect current economic woes, but also reflect structural issues that the EU economy faces when it comes to retaining competitiveness as it moves to a more sustainable and digitalised future. Combining unemployment with corporate failure might lead to a negative feedback cycle of failed companies cutting jobs, which in turn cut spending, potentially setting off other failed companies.

There are several closely linked reasons for the recent European epidemic of unemployment and corporate bankruptcies, whose main causes are inflation and energy prices. Inflation remains the most pressing problem of the EU economy, according to the latest forecasts of the European Commission with HICP standing at 6.4% in 2023 and gradually falling to 2.7% in 2024. With such inflation, consumer spending power has significantly been reduced and demand across various areas has decreased.

Energy crises caused by the Russia-Ukraine war have been particularly problematic for European companies. SME are especially at risk from cost/inflation increases and supply chain disruptions, the working paper points out. Energy-intensive sectors have taken a special beating, and most companies can’t keep up with rising costs of operation.

Russia-Ukraine war threw a huge wrench in European supply chains especially when it comes to raw materials and energy supplies. Although supply chain pressures have mellowed slightly since the high point of its height – the Global Supply Chain Pressure Index is now normalising – geopolitical risks and cost pressures remain high for European companies.

Such disruptions have hit the East European industries hardest.  In Eastern Europe, the cost of financing is on the rise and refugees have come – according to the UN, more than 3 million people recently expelled from Ukraine have turned for shelter in Eastern Europe.  They are privileged because they are geographically close to the war zone and historically more traded with Russia, which made them highly susceptible to supply-chain restrictions. The regional effect shows up in data for greater corporate distress in eastern European economies.

The European Central Bank’s response to inflation through monetary policy has brought further problems for enterprises, especially SMEs. Corporate borrowing costs have increased strongly after many years of low or declining interest rates, and the ECB corporate borrowing cost index is now 4.99% as of August 2023 – higher than it has been since 2008. With this dramatic rise in borrowing costs, it’s become increasingly difficult for smaller companies to service debt and get access to new finance.

These higher interest rates have hit especially hard in the SME market. “Microenterprises have reduced the recourse to external financing sources compared with their larger counterparts, likely because of the challenges in obtaining finance” as per recent ECB SAFE survey results.

Instabilities within the European economy made matters worse. High taxes and labour regulations in most EU nations limited companies’ ability to react to economic changes. This is especially a bad thing in times of economic strain when there’s not much time for firms to change how they operate depending on the market.

This all combined to create a harsh reality for European companies, including SMEs. The report shows “EU corporate investment remains under-acclimatized to the shock caused by Covid-19”. Recovering by nearly 30% in the first semester of 2020, investment has been slow to bounce back on trend lines a little weaker than the pre-Covid times.

In the future, these issues call for coordinated policy responses on the EU and country-level. Policies are performing quite differently at each region and in different sectors — this implies that it may be more appropriate to intervene at individual levels in specific weaker regions in the European economy.

Combining all of this – inflation, energy, supply-chain disruptions, monetary policy, structural rigidities – has carved out a complicated crisis environment that specifically affects small and some regional economies. Such entanglements are the key to formulating effective policy interventions to promote European economic recovery and resilience.

Unemployment and corporate bankruptcy are roiling the European economy and, in particular, the SMEs. European small and medium enterprises (SMEs), whose market share in EU GDP was 50 per cent, according to the European Small Business Council Finance Outlook,  “SMEs relative contribution to EU value added has decreased strongly in recent years, declining by more than a percentage point since 2019.” This loss of SME activity has direct consequences for the economy as a whole, as SME are at the centre of European economic life.

The market has been volatile more than ever as higher bankruptcy rates shake investor sentiment. The outlook points out, “during the first semester of 2023, 24% of Euro area SMEs reportedly experienced severe access to finance issues”, a measure of worsening market conditions. Such insecurity results in a feedback loop in which lower investment results in more business failure, which further undermines investor trust.

This investment side effect is particularly troubling. “Corporate investment in the EU has yet to recover from the shock induced by the Covid-19 pandemic, as investment levels are still trending below pre-Covid levels.” the source added. This investment invisibility jeopardises the future of economic growth and competition.

The social effects of the current crisis are extensive and potentially permanent. Perhaps the greatest issue is skill degradation in the jobless. Over long periods of unemployment, skills and expertise can be lost and people have less chance of returning to the labour market. This is especially true of youth unemployment, which the report stated “is now more than 20% in many European countries and has the potential to be a “lost generation” phenomenon”.

And psychiatric effects are another major social consequence. In a report called SOCIAL CONSEQUENCES OF ECONOMIC CRISIS, it says economic disasters inevitably cause “increased risks of disease, violence, and insecurity,” especially for the most vulnerable. Unemployment and income insecurity are determinants or contributors to mental illness, which is a further drain on health care and social services.

The crisis has increased inequality on multiple fronts. In the outlook, “SMEs’ employment and value added shares have fallen since 2010,” which shows a growing gap between Big Corporations and Small Businesses. Such economic inequality often manifests itself in social inequality, and especially among the most vulnerable. “Lots of small businesses today are also thinking more carefully about environmental and social implications when they make decisions,” reads the paper, but they aren’t able to solve these issues due to cost-restriction.

Local disparities have also increased. According to the outlook, “there are pronounced differences in the relative contribution of SMEs in national production and employment.” Greek SME employs over 80% of the labour force, for instance, and French SME hires about half of the French workforce. Such regional variation in economic order results in asymmetric consequences of the crisis that might even compound regional differences.

This is a social network further undercut by what the document refers to as the “new poor” – educated, younger, working-age people from pre-industrial areas where unemployment has spiked the most. These people might stand a better chance of climbing out of poverty once the economy is up, but at the moment they are socially unstable and strident.

The crisis has also made gender inequality in the workplace visible and pronounced. As the paper points out, “women are often most affected by these changes” in jobs and wages, especially in low-income countries where they could be the first ones out of work.

Such social effects leave potential long-term consequences for European society. The decline in skills, mental health issues and inequality could all combine into a “bewitched circle,” the report says, of social injustice ebbing and flowing back to economic misery, a downward spiral that is more and more difficult to escape.

The combination of economic and social forces make the diagnosis of this crisis especially fraught. Any answers will need to weigh up the plight at a macro level, and also at the micro level for them to matter. This, as the report implies, calls for a ‘whole-system approach – a combination of economic assistance and social policies to safeguard vulnerable populations and sustain social stability’.

Future, for policymakers, will be to find interventions that can deal with both the economic and social aspects of the crisis, while also strengthening resilience to shocks in the future. That could mean new forms of social protection and economic aid that better adapt to the dynamic of the contemporary economic crisis.

Policies need to respond immediately if the effects of unemployment and corporate bankruptcy are to be mitigated. Support should be targeted more specifically at the vulnerable, because women and other vulnerable groups are particularly affected by the economic crisis, states the source document. Increasing unemployment benefits and mental health services therefore need to be expanded to avoid lasting social harm.

This energy emergency requires tailored interventions – especially in small and medium-sized enterprises, already hard hit by rising prices. From the outlook, energy prices hurt both parties: they increase financial burden on SMEs, but they also boost investors’ demand for higher returns. Extending energy subsidies and encouraging energy efficiency could allow companies to absorb costs without putting them into a long-term state of support dependence.

Resilience in the long term involves structural adjustment of the European economy. According to the outlook, “Digital technology increases financial inclusion” and Investing in innovation is an essential part of future competitiveness. Assisting SMEs in their digital transformation journeys can result in stronger business models better able to cope with the next economic storm.

This means vocational training and reskilling because “skill development through coaching and mentoring is critical,” states the document about working-lessons-involved groups. This is especially relevant as some industries go under, and others go up, and workers have to find their place.

Divestment in energy is an essential aspect of long-term resilience. “energy-efficient SMEs can achieve more predictable operating costs” and be “less susceptible to cost increases in electricity, gas, or other energy sources”. By investing in different forms of energy and improving efficiency, business operating expenses can be fixed and less prone to shocks from the outside of the energy market.

Better EU-wide coordination is needed to tackle economic inequality between member states. ”credit rationing becomes particularly relevant for this sub segment of the market”, it notes, adding that coordinated fiscal and monetary policies are required to make access to financing equal across the EU.

Partnerships in trade are essential for improving supply chain risk. “supply chain disruptions have been resolved” in certain regions, according to the outlook, but it is still vital to have strong international trade ties to keep disruptions at bay.

These are policy proposals to build a stronger European economy while solving the present problems. They know that long-term recovery demands both short-term accommodation and structural reform. It’s designed to allow businesses and individuals to adapt to new economic conditions, as the paper puts it, while securing more robust bases for growth in the future.

They will need to be implemented on a concerted basis at all levels of government and with effective cooperation between the EU states if they are to succeed. These will need to be monitored and updated regularly to make sure they’re efficient and responsive to shifting economic environments.

This euro-wide wave of unemployment and corporate bankruptcy is a crisis that has multiple, related causes. Inflation — as is noted in the text — has been unstoppably high and energy prices have increased because of geopolitics, especially the Russia-Ukraine conflict. All of these stresses – along with structural inefficiencies in European markets – have posed great problems for businesses and for employees.

This has been especially hard on SMEs, the foundation of the European economy. The source document says that the contribution of SMEs to EU value added has shrunk drastically, and 24% of SMEs in the Euro area say they find access to financing extremely difficult. This has led to a worrying vicious circle of cash shortfalls leading to company failure and thus higher unemployment and economic instability.

Responses in policy at the EU and national levels have been some relief. But the success of these interventions has been far from universal in all regions and all sectors. Data to date indicates that some of the immediate damage has been reduced but structural challenges are still unsolved. Corporate investment is still lower than pre-pandemic levels indicating continued uncertainty and low business optimism.

Collaboration abroad will be key to success, especially on vulnerabilities in supply chains and uniformity of policy implementation within the EU. As we saw in the source material, regional differences in economic activity and recovery indices point to a coordinated response on European level.

The way forward will need to find a way to strike the right balance between the immediate needs of the moment and long-term solutions. Short-term accommodation is still needed to stop further company failures and job losses, but true resilience will require long-term structural reforms and strategic investments. Whether that’s enabling SMEs with access to finance, digital transformation, or opener labour markets.

If Europe does this holistically, not only will it be able to solve the crisis now, but it will have greater foundations for growth into the future. It will require sustained effort on the part of policymakers, companies and citizens, and continued international collaboration to solve shared problems and opportunities.

By Hongyi Gao