Competitiveness of European Union firms negatively impacted by energy crisis

The European Commission published a report assessing the impact of the energy crisis in different industry sectors. The main conclusion is that the exorbitant energy prices has had a negative impact on the competitiveness of European Union (EU) firms, particularly in energy-intensive sectors with Basic Metals, Air Transport, and Chemicals being the most exposed ones, with a particularly negative impact in terms of industrial production and overall confidence trends.

Main takeaways from report:

• The energy crisis is having a sectoral impact on the EU economy. The most energy-exposed sectors are experiencing higher declines in production and confidence indicators than other sectors. The most energy-exposed sectors are Basic Metals (12 cents of energy inputs are needed to produce 1 euro of final demand of basic metals), Air Transport, and Chemicals (with 8 and 9 cents respectively). Another factor of vulnerability is that China and US use mostly domestically sourced energy, whereas in the EU the opposite is true for almost every major energy-exposed sector.
• The EU is more vulnerable to energy shocks than the US and China due to the structural composition of its economy, which requires a higher share of energy to produce its total final demand. In the EU, the overall energy exposure of the economy is around 4.4 %, which is significantly more than the US (2.5%), but less than manufacturing-oriented China (6%).
• The 10 most energy-exposed sectors in the EU represent more than 10% of both total value added and total investment in the EU economy, with land transport being the most important sector in terms of value added and employment. With a few exceptions, SMEs play an important role in these high energy exposed sectors.
• The EU has proposed and adopted measures to tackle the energy crisis, including the REPowerEU Plan and emergency support measures. The EU has managed to reduce its dependency on Russian gas (from 45% in 2021 to 14% by September 2022), but efforts to diversify sources of supply, save and substitute gas with other energy sources, and ensure long-term contracts are still needed. The future price dynamics of gas may be influenced by the EU's capacity to compete for LNG gas shipments.