Netherlands leadership says Europeans need to get used to being poorer. Bad policy decisions leading ... [+]
Updates and corrects throughout. This story ran on September 5th evening. It updates by naming Ursula von der Leyen as the European leader that has most often blamed Russia for rising fuel costs in the EU. And corrects the natural gas price hike, which used percentages instead of points.
Top European leaders often cite Russia and its invasion of Ukraine for many of the problems facing the continent, which is reliant on energy supplies from Russia. Ursula von der Leyen is constantly blaming Russia for Europe’s energy problems. But those following the markets and watching global business may also see that some of Europe’s problems also have to do with its post-fossil fuel economic policies.
Will the world suffer the consequences of this policy direction; a direction the EU has said it was taking as recent as 2021?
There are three things to consider here.
First, China is also slowing down. Thanks to its zero Covid policy, which put part of Chengdu city on lockdown last week, China is also impacting supply chains. And while there doesn’t seem to be any companies laying off because of this — as was the case last year when auto companies like GM temporarily furloughed workers because it couldn’t get basic semiconductors from Asia. No one can discount China’s slowdown as recessionary as China is the single largest consumer of commodities, something emerging markets and even the United States rely on for exports.
Another thing to consider is that in 2008 oil was over $180 a barrel. That summer, Goldman Sachs forecasted oil at $200. Gasoline was easy $4 a gallon in California, if not $5. Natural gas was over $13 per metric million British thermal units. Today it is around $8.
Yet, Europe didn’t suffer any of the problems it is suffering now. No one in the power structure of the European Commission, the European Union, in Germany, in France, not a soul, was calling for energy rationing and asking farmers to reduce fertilizer because fertilizer is also sourced from petroleum and — from Russia. No one did this even with Russian imported fuel at historic highs. No leaders were talking about living frugally while in a mansion surrounded by gold leaf panels. No one blamed the high diesel prices on Russia.
So all of this is policy driven. Russia is not the only country in the world that has oil and gas, even if the European Commissioner seems to think so.
Markets drove up prices because speculators do what speculators do — bet on markets, bet on policy. They saw Europe taking an about-face on Russian oil and gas supply, so they jacked up the price expecting shifting allegiances and new price negotiations from the Saudis and Emiratis.
The crisis in Europe is a policy error. It is designed to force-feed Europeans on a post-fossil fuel economy, and into a new industrial revolution, one in which — it seems — they will be less likely to participate in as energy prices in Asia and Latin America are nowhere near where they are in Europe.
There is no way no one in Europe’s senior leadership thought that by seizing over $25 billion worth of the Central Bank of Russia’s money, the Russians would only retaliate by banning imports of Nordic codfish. Seriously, people? So Russia has delayed shipping natural gas to Europe. But Europe can get it elsewhere.
Like China.
Despite energy prices rising elsewhere too, nothing compares to the Euros.
In August, Brazil’s hydroelectric dams priced electricity at $36 per megawatt hour. Germany? That’ll be 315 euros per megawatt hour, danke.
If Europe goes into recession, and it will, it will buy fewer commodities from Brazil, Argentina and the U.S., its biggest suppliers.
There is a chance that Europe will still be forced to import more food anyway because of, once again, its ludicrous food and fuel policies, but that is unknown. Will a weaker economy mean weaker demand, especially if inflation is high and European companies go broke, or downsize? Indian multinational steel maker ArcelorMittal said it will be closing two steel mills in Europe due to high energy costs.
High-paying engineering jobs are already being cut at European tech firms.
Earlier last month, German wind turbine maker Siemens Gamesa said it is aiming to cut 1,500 jobs.
European stocks are underperforming the U.S. and most big emerging markets except China. The European Central Bank shows no signs of easing. With inflation over 9%, it is unlikely the ECB will step off the brakes.
FTSE Europe heading south while Mexico and Brazil are going up. This is unlikely to continue if ... [+]
Economic Growth Forecasts
It is wise to remember that natural gas prices rose, let’s say, around 700 points in all the volatility. There is no reason those prices can’t fall 500 points. Natural gas futures were just under $4 per BTU at the start of the year and hit a high of around $9.7 on August 22.
All the talk about a rough, cold winter in Europe may just be media drama. Anti-nuclear Germany is already saying it will keep two nuclear reactors operational after pressure from anti-nuke activists to shut them down following the Fukushima power plant disaster in Japan over a decade ago.
If electricity prices keep rising, then Germany will be in a recession soon. They would be better off throwing money at oil, gas and nuclear to signal to the market that Europe is not giving up on fossil fuels.
They’ve gone from Covid relief packages now to inflation relief packages.
“The third relief package does little to change the fact that Germany is likely to slide into recession in the autumn,” Commerzbank chief economist Joerg Kraemer was quoted as saying in Reuters on Monday.
ING chief economist Carsten Brzeski told Reuters the same thing, “The package will probably fall short in preventing the broader economy from falling into recession.”
European economies are alive because of stimulus. It’s making inflation worse, adding to the already high pricing pressures caused by fuel and food. They now conserve electricity in parts of Europe, as is happening in Germany. They’re not doing this in India and Brazil.
It’s fine, though. The Netherlands’ leader Mark Rutte is ready to ration.
“You cannot help everyone so...we in the West will be a bit poorer because of the high inflation, and the high energy costs,” Rutte was the first to say when prices began rising in May.
The International Monetary Fund downgraded the 2023 growth forecasts for Germany, France, Italy and Spain, citing the Russia-Ukraine war uncertainties and higher interest rates to curb high inflation.
In the UK, inflation is above 10% for the first time in 40 years. The Bank of England forecasts inflation will peak above 13% in the fall, but that’s okay, because they are so rich in the UK that they are raising electricity rates by a reported 80%.
They’re not doing that in Vietnam.
Europe is one policy blunder mixed with mega-greed on top of the other. German utility company EnBW said it will raise its electric power rates by 31% starting October 1.
Last week, the Economist Intelligence Unit (EIU) lowered its growth forecasts for the global economy. All of the European economies were downgraded, but for some reason, they are still positive for 2022.
Russia got the biggest downgrade, but despite being an oil economy, too, Saudi Arabia got the ... [+]
Next year looks better for almost everyone. Except for Europe. Here’s how the EIU sees 2023 GDP.
- China: 5.3%
- India: 5.1%
- South Africa: 2.4%
- United States: 1.2%
- France: 0.3%
- Brazil: 0.3%
- EU27: 0.3%
- UK: -0.6%
- Germany: -1%
- The Netherlands: -0.9%
- Italy: -1.3%
- Russia: -3.4%
The takeaway: these numbers will be revised lower unless Europe gets its act together on its fuel and food policy. Those commodities, coupled with stimulus, are leading to high inflation. This, in turn, means higher interest rates at a time when the economy is taking a turn for the worse.
Once the market senses a change of heart in Europe, oil and gas prices will come down to earth and stop rising on that uncertainty, even if supply remains tight. From there, it will be a matter of curbing inflation, which depends on Europe’s central bank.
Inflation concerns are a tailwind. The ECB will either abandon its inflation-fighting mandate or cut it in half by slowing the economy. Such will be the tug of war in the markets for the rest of the year.
The big surprise will be a Fed pause — though with last week’s strong job numbers, a pause in rate hikes is unlikely this year.
So long as U.S. policymakers don’t track European food and fuel policies, the U.S. should turn out okay and remain the best in the Western markets.
Instead of a strong, stable and growing economy with a future, Europe looks like a region on the wane. High electricity means manufacturers are better off manufacturing abroad. Higher electricity means small businesses can’t afford to keep their lights on.
How long will the Europeans go along with that?
