Over the last 12 months, prices in numerous European countries have risen at their fastest rate in several decades. Households, as well as the economy, are facing tremendous inflation rates and must find ways to handle the situation. Not surprisingly, the pressure on policymakers in the Western world to change the current state of affairs has increased. In the following study, we examine how the national policies of the various European nations are responding to tackle massive inflation and what this means for households, for the economy and, foremost, for the construction industry.
We base this study on a broad set of data from trusted and publicly available sources.
What are the Reasons for the increasing bills prices?
A number of political parties and populists view inflation as a perfect opportunity to blame a scapegoat such as another party, political decisions or countries. In reality, however, the picture appears not to be black and white, but much more nuanced. There is no single trigger that is responsible for the current situation, but rather a multitude of different elements triggering and driving high inflation. Among the biggest contributors to inflation are the high amount of money in circulation following the Covid relief packages, the disrupted supply chains and the high energy prices that resulted from the war in Ukraine.
European countries comparison and how national policies responses to this crisis with fiscal measures
In the following, we examine and compare how the governments of different European countries are responding to the rising cost of bills.
Inflation in Germany rose to 10.0 per cent last month. This means that the inflation value has increased by 0.6 per cent more than predicted and is the highest it has been since 1951. To ease the burden on consumers, Germany introduced unique measures such as the 9-Euro ticket and the fuel price reduction, which were supposed to lower mobility prices for Germans. However, these measures have now come to an end and German politicians are struggling to find new solutions. The idea of temporarily operating nuclear power plants a little longer than planned is currently finding favour from the left to the right. Even the Green Party, which emerged from the anti-nuclear movement, has become a governing party and favours longer operation of nuclear power plants. The latest plan from the German Ministry of Economics includes support for gas customers to ease the financial burden. The plan is an emergency subsidy that is supposed to relieve gas consumers of up to 200 billion euros as of next spring.
With consumer price inflation at 10.5 per cent, inflation in the Federal Republic of Austria is even slightly higher than the rate in Germany. Austria’s politicians have resolved to take active action against the rampant inflation in the country. Back in June, the country announced its intention to abolish cold progression. Markus Brunner from the Ministry of Finance stated that the abolition of cold progression is a solution to relieve the population from an inflation that will remain high for a long time. In addition, employers are provided the opportunity to transfer a tax-free cost-of-living bonus of up to 3,000 euros to employees until the end of the year.
Switzerland is neither a member of the European Monetary Union nor of the European Union. Compared to its neighbouring countries, Switzerland was largely spared from soaring inflation. However, with an inflation rate of 3.3 per cent, the Swiss National Bank missed its target of 2 per cent by 1.3 per cent. As a measure against inflation, the Swiss National Bank raised key interest rates sharply several times. This is particularly surprising, as the Swiss National Bank is traditionally considered to be very reluctant to raise interest rates. For now, however, there are no further benefits for consumers in the form of lower transport costs, cheaper energy or tax relief in Switzerland. The only major measures are a cost-of-living adjustment for old-age and dependents’ insurance and the decision to increase insurance rate reductions to allow people on low incomes to benefit from lower health insurance fees.
In France, inflation has risen less sharply than in Germany and Austria. However, at 5.6 per cent in December compared to the same month last year, France’s inflation is also above the government’s newly set 2 per cent target. Nevertheless, France is ranked as the country with the second-lowest inflation among the G7 countries, after Japan. France’s president has furthermore publicly opposed the policy of Christine Lagarde, president of the European Union’s monetary authority, since the European Central Bank’s last interest rate hike of 0.75 percentage points. Nevertheless, Macron’s policies are under pressure as well. In protests, employees and unions, which are strong in France, are pushing for wage increases and tax cuts.
Italy’s inflation was at 8.9 per cent year-on-year when last announced in September 2022. The southern European country is heavily indebted and is therefore considered particularly threatened by the ECB’s key interest rate hikes. It is therefore not surprising that the newly elected head of government, Giorgia Meloni, questioned the ECB’s policy right at the beginning of her term in office after the latest government crisis. Giorgia Meloni stresses the danger of an impending recession. As early as spring 2022, the previous government under Mario Draghi decided on a billion-euro package to ease the burden on households and companies.
Like Italy, the UK was rocked by government crises during the period of high inflation. After the resignation of Boris Johnson, the new Prime Minister Liz Truss made it her goal to fight the around 10 per cent inflation. With her highly controversial tax relief package, Liz Truss lost support within her own ranks shortly after taking office. The dismissal of Finance Minister Kwasi Kwarteng heralded the end of her term, which she confirmed on 20 October, after only 44 days in office. Britain’s new prime minister Rishi Sunak announced that he would present his new fiscal plan, which was scheduled for 2 November, on 17 November 2022.
Spain’s 12-month inflation fell slightly in September to 8.9 per cent. Similar to Italy and France, voices were raised in Spain in criticism of the ECB’s stance. Spain is heavily indebted as well, and repaying its debts is made more difficult by the high interest rates. In contrary to France and Italy, it is rather the opposition in Spain that complains about the ECB. Spain’s government, on the other hand, is more or less in line with the ECB’s policy. In order to relieve the population from inflation, the government announced that it would introduce a higher tax for the super-rich, which would benefit the disadvantaged part of the population.
Inflation in Poland is now over 17 per cent and there is no real improvement in sight. The Polish government under Andrzej Duda reacted earlier this year with a protective shield against inflation. Unfortunately, this shield has not yet been able to have its desired effect and Poland’s economy is at a standstill. Poland, an EU country, is not a member of the European currency area and has its own currency, the zloty. Because of the already severe economic difficulties, Poland’s central bank is refusing to raise its interest rates. However, since there is hardly any fixed interest rate when granting loans in Poland, private and business loans have nevertheless become enormously more expensive, which curbs the desire to invest in the country.
In Hungary, inflation reached over 15.6 per cent in September, compared to September 2021. Hungary, which like Poland does not use the euro, decided to raise interest rates further. The increase in the key rate was a whopping 1.25 per cent. Hungary was one of the first countries to introduce measures against inflation, setting a government cap of 480 Hungarian forints per litre of petrol at the pump as early as November last year. In October, this year, president Orbán’s government announced that it would extend the price caps for fuel and basic foodstuffs by three months until the end of the year in order to protect households from rising costs.
Inflation in Romania has also exceeded the 15.9 per cent mark. The most recently published statistics on inflation refer to September 2022 and suggest a devaluation of the Romanian lei of 15.1 per cent. Already in spring, this year, the Romanian government decided to regulate prices and capped the price of gas. Moreover, a new tax law will allow employers in Romania to pay their employees non-taxable benefits up to a total of 33 per cent of their wages from 1 January 2023, thus increasing their staff’s gross wages.
Ireland is another EU country suffering from high inflation. In September, however, the inflation rate decreased from 9 per cent in August to 8.6 per cent. This means that Ireland is now one per cent below the annual high of 9.6 per cent again. Hopes are running high among policymakers that inflation will continue to decline. Between May and October this year, Ireland reduced VAT on gas and electricity bills. More recently, at the end of October, the Irish government agreed on a cap on the wholesale cost of gas to bring down energy prices. At the ECB conference in Cyprus on 18 October, Ireland nevertheless explicitly warned of intensifying inflation across Europe.
Comparison of inflation among European countries
Below, you will find a table with the most recent inflation rates among the countries surveyed:
How does this increase affect the construction and real estate industry?
The reactions of various states in Europe to the rising prices differed. But the bottom line remains the commonality of interest rate rises. Except for Poland, we will almost certainly see further interest rate hikes if inflation cannot be brought back under control.
For the construction and real estate sectors, the current situation is tough right now. Commodities are more expensive and harder to get, energy costs have gone up, borrowing is getting costlier and demand is falling. The economy is forced to look for innovative ways to cut costs. This is especially the case for the construction and real estate sector.
Recommendations on how to save energy and money for companies
Several factors are affecting the construction and real estate industry at the moment. Now it is essential to look for ways to cut costs.
Saving energy costs
Energy costs are currently one of the major cost drivers on construction sites. However, the high costs also bring some advantages. After all, now is an excellent time to invest in new and energy-saving machines and vehicles. With the high energy costs, such investments are more worthwhile and are amortized more quickly.
Finding suitable supply partners
In sectors such as construction or real estate, long-term partnerships are advisable. However, with the high cost of materials, it may be worthwhile to look for additional supply partners at the moment. Moreover, some companies buy in large quantities in order to brace themselves against further price increases.
Work more efficiently
To save work, time and money, it is worth investing in digital technologies that simplify work processes and improve efficiency. One such option is professional construction software such as PlanRadar. With PlanRadar, you manage your construction site or property through all phases and ensure a smooth and cost-efficient process.
The current situation is burdensome for households and the economy. With the rapidly rising energy costs, life is becoming more expensive and the already high inflation is being further fuelled. Politicians in Europe have taken notice of the problem and are trying to combat the effects. Since the central banks have no influence on the supply side, they are trying to reduce the flow of money by raising interest rates. Many countries like Germany, Hungary or Ireland are additionally attempting to safeguard the population and the economy with more extensive measures.
Nevertheless, the effects are devastating, and the construction and real estate sectors in Europe are no exception. Companies are struggling against high costs that reduce demand. The most promising solution for construction and real estate companies currently is to endeavour to reduce their costs and work more efficiently.