High inflation, energy crisis and rising interest rates are creating the conditions for a perfect storm in the European economy. More and more data are lending credence to those predicting a depression in the coming months.

Some 20,000 SMEs disappeared in August in Spain and 90,000 are in technical bankruptcy. Moreover, up to 700,000 have serious liquidity problems. This is according to the latest barometer of the Consejo General de Colegios de Gestores Administrativos de España.

As if we are already getting used to the exorbitant inflation figures that shake us every month, these data on the evolution of the productive fabric highlight the magnitude of the crisis in SMEs, the main engine of the Catalan economy.

The truth is that the economic slowdown is advancing by leaps and bounds not only in Catalonia, but throughout Europe. Non-performing loans to companies are on the rise across the continent. Businesses will find it increasingly difficult to survive in a context of high inflation and energy crisis. One revealing fact is that production costs in Germany have risen by 45.8 % in just twelve months. All indications are that an “avalanche” of company and household bankruptcies is on the horizon.

Is collapse imminent?

Tuomas Malinen, professor of economics at the University of Helsinki and CEO of the consultancy firm GNS Economics, is one of the leading voices that have been warning for months that European economies are “on the verge of collapse”.

The Finnish economist points out that fixing Europe’s energy deficiencies is likely to take years, which could lead to the permanent closure of many industries in the absence of Russian gas supplies. He is not alone in this view, as a recent article in The Economist also warned against the risk of deindustrialisation.

Unfortunately, Europe’s business sector faces a triple challenge. First, high energy prices are pushing companies to cut production and close factories. Secondly, high inflation is eroding demand. And third, interest rate hikes – from 0% to 1.25% in little more than two months – are making credit more expensive, both for businesses and consumers.

Ten steps towards disaster

In February, Malinen posted a Twitter thread detailing ten steps that could happen if war broke out between Russia and Ukraine.

1. The West would likely respond with sanctions.
2. Russia would respond by shutting off gas to Europe.
3. This would lead to a massive increase in energy prices in Europe, pushing the continent into a recession with high inflation pressures (stagflation).
4. Inflation would reach double digits in two to three months.
5. Asset markets would first fluctuate sharply, and then collapse.
6. Runaway inflation would force the European Central Bank to raise rates rapidly and stop the Emergency Purchase Programme (EPPP) and quantitative easing (QE).
7. The European banking sector would collapse.
8. Sovereign bond yields would soar.
9. The eurozone would unravel.
10. Europe would fall into a depression.

Half of his predictions have already come true, so all indications are that we are heading for a severe economic depression.

The limit situation

Malinen says the speed at which the economy is deteriorating is enormous and that “chaos” is a matter of “weeks, months at most”. He recently recommended stockpiling cash, water, food and wood to cope with the economic and social crisis that is looming.

The current conditions could kill the market economy and increase state interventionism. For example, the first measure of Lis Truzz, the new British prime minister, was to freeze the price of electricity bills and compensate for it by issuing debt. And more than thirty countries have introduced food export restrictions, which could lead to a new food crisis.

Moreover, Tuomas Malinen warns that China will not be able to come to the rescue of Western economies as it did after the 2007-2008 financial crisis because it is an economic giant with “feet of clay”, as its growth since 2007 has been based on “relentless and totally unsustainable debt stimulus”.

In short, a growing number of economists believe that the collapse of the European economy is already underway.

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