🔋No Rescue, EU

The European Union issues compound as cooperation deteriorates and divisive monetary policy plague the continent.

Jul 29, 2022

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The EU is in serious trouble. The latest monetary policy of the European Central Bank (ECB) is to purchase bonds of struggling countries while raising interest rates to fight inflation. On top of this, with lower gas flows from Russia, the EU called for member states to reduce gas flows by 15% to help countries like Germany who are struggling to meet their energy needs. Spain and others have said they won’t reduce gas consumption.

Javier Blas @JavierBlas

NORTH vs SOUTH 2.0: Spain, Greece and Portugal reject the EU call for 15% cuts in natural gas consumption to help Germany Spanish Energy Minister (clearly aiming at Berlin): "Contrary to other countries, Spain hasn't been living beyond its means in energy terms" #EnergyCrisis

Javier Blas @JavierBlas

Good op-ed to understand the position of southern EU countries (like Spain, Italy, Portugal and Greece) opposed to the blanket 15% reduction in natural gas consumption proposed by the European Commission

elpais.comCrisis del gas: solidaridad, simpatía y racionalidadLos porcentajes de reducción del consumo incorporados en la primera propuesta de la Comisión Europea son injustificadamente lesivos para España y Portugal

I have talked about Germany’s energy woes in the past, and their energy policy is silly, or at best, contradictory. Their move to renewables has highlighted their dependence on Russia energy imports and the lack of preparedness of their renewables mix to take over. They are doing their best to shut down their remaining nuclear power plants and are burning coal and wood instead. Their stated mission for deploying so much renewable capacity is to lower carbon emissions, but they are shutting down nuclear and resorting to dirtier fuels to fill the gaps that they are missing. Could one conceive of a bigger disconnect between platitude and action?

Monetary Policy

Currently, the ECB is raising interest rates in effort to fight inflation, but at the same time announce bond purchases for certain member countries. This is a conflicting policy in which the ECB is creating new money to buy bonds of a certain country. This creation of new money is essentially redistributing wealth from productive countries to bail out the struggling ones.

IceCap @IceCapGlobal

Absurd day for #ECB as they'll try to raise rates to 0% and bailout #Italy at the same time. $EUR

*Walter Bloomberg @DeItaone

*ECB To Launch New Program Of Bond Purchases Aimed At Countering Fragmentation

Omega BLADE @OmegaBLADE97

@DeItaone perfect, tell to the Germans that you are selling their debt (making it more expensive) to finance Italian deficits, they will love it!

Modern monetary theory would tell us that excess money supply does not affect inflation, but gone are the days of cheap energy, healthy demographic trends, and increasing deglobalization for the short-medium term.

Can you really blame Spain for not wanting to help by rationing energy for their own citizens and industries when this situation was avoidable and the fault of those other nations? This combined with economic bailouts/stimulus to struggling countries like Italy that need to be bailed out are causing tensions between EU states. Things could get worse economically as central bank asset purchases, combined with extremely low interest rates (EU has been in negative real interest rates) is very detrimental to people in the long term. If no productivity is to be accompanied by the increase in monetary base, then this monetary inflation could add fuel to fire of a sovereign debt crisis that is well in the making.

Energy Market

Europe has a need for natural gas whether they like it or not. Last week I discussed that the United States does not have adequate LNG export capacity to save Europe from the worst-case scenario in which Russia shuts of gas flows completely. Currently the repaired turbine which was the cause to the shutdown of the Nord stream 1 pipeline from Russia to Europe recently was returned, however Russia cited other repairs as reason to indefinitely cut flows down to 20%. This is not the nightmare scenario of 0%, but it is certainly not good for a European continent who has been rationing electricity already and has not filled up its storage for winter fully.

Javier Blas @JavierBlas

🚨🚨BREAKING 🚨🚨 ⚠️Gazprom halts one more turbine at its main compressor station in the Nord Stream 1 gas pipeline ⚠️Gazprom says NS1 flow will drop from July 27 to 33mcm / day (down 50% from ~60mcm / day currently, and equal to just 20% of the pipeline capacity)

Javier Blas @JavierBlas

With Nord Stream 1 flowing at just 20% of capacity from July 27, Germany will NOT have enough natural gas to make it throughout the whole winter **unless big demand reductions are implemented**. Berlin will need to activate stage 3 of its gas emergency program #ONGT #EnergyCrisis

Eric Townsend from MacroVoices predicts that winter would be the most strategic time for Russia to cut flows to Europe to really put pressure on the western nations and their sanctions. Europe stockpiles natural gas and they currently have 60% of what they need from winter stored. In order for Russia to put the hurt on Europe this winter, they would need to start now, and unfortunately it looks as if they are.

Currencies

Russia is a part of the BRICS economic system which is trying to become a new global currency/trade regime backed by hard assets like commodities. This is a direct threat to the US dollar hegemony. Some have said that the Ukraine conflict basically a proxy war with the US/west. The Ruble has strengthened greatly, and sanctions have only made prices of key commodities go up, in consequence emboldening Russia in the end. With the hard stance of many “western” countries not to produce these commodities through drilling and mining, the supply is going to stay constrained, keeping prices high for some time to come. There is a supply inelasticity due to this fundamental problem of long-term capital expenditure and mining/permitting requirements and renewables such as wind and solar are not currently prepared to handle the pressure. The result is higher electricity and energy costs across the board in Europe.

Javier Blas @JavierBlas

CHART OF THE DAY: European natural gas benchmark contract (Dutch TTF) rises above €190 per MWh, highest since early March (white line). Importantly, look at the monthly averages (pink stepped line), showing that **sustained** prices are already at a record high | #EnergyCrisis

EU Trouble

Without the ability to stockpile energy resources, Putin could play hardball into the winter, putting tremendous pressure on Europe. Even with the ECB purchasing bonds to subsidize the countries, they cannot print the gas they need like they can “print” money.

Wall Street Silver @WallStreetSilv

Don't worry, EU central bankers will print more natural gas. ECB President Christine Lagarde to the rescue !!

Unfortunately, with the counterproductive energy policies and redistributive monetary policies of the EU, other counties could grow sympathetic to Great Britain’s position outside the realm of the EU, regardless of the free trade benefits it offers. Britain, or the UK wasn’t even using the Euro and under the control of the ECB like some of the other EU members. As energy issues escalate, how long will the central bank be able to bail them out? As prices for food and energy continue to loom large over Europeans, only time will tell who will wake up and demand change first, the people, or the politicians.

I will leave you this week with some tough, thought-provoking questions about the future state of affairs.

Without the proper rationing of gas in other countries and the inelastic supply of natural resources, how low will the level of prosperity in Germany get, will they turn on their nuclear fleet or continue to burn more wood and coal, will their industries get destroyed, to what extent will they curb demand/restrict usage to ease energy use?
How far will the ECB go to raise interest rates while the average debt to GDP of eurozone nations is 95%? Debt service could become unpayable as interest increases, printing the difference as they already are will only cause more debt/inflation problems.
How will people respond to a lowered standard of living from energy shortages/rationing in addition to paying the price/bailing out large banks via monetary inflation?

Now I’m certainly no expert on geopolitics or European policy, but I try my best to stay open minded about what is going on and pay attention. When words and actions are not lining up, when average people are footing the bill, and when there are clear signs of countries not cooperating, it’s seriously time to pay attention.

-Grayson

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