It’s time for another gloom & doom post, as I’m working my way through new numbers and insider comments. In this case, I want to reiterate that Europe is dealing with bigger problems than most are acknowledging. This crisis is taking longer than expected and governments are not in a good spot to support struggling households and corporations.
In this case, I need to give credit to Bloomberg, which just published a fantastic article including the graphs I’m using in this article.
As most of you are aware of what’s going on, I’m getting right to the point.
Europe is dealing with $1 trillion (with a T) in higher energy costs. That’s before we try to refill storage levels for the upcoming (2023/20204) winter without Russian gas.
According to the aforementioned Bloomberg article:
While governments were able to help companies and consumers absorb much of the blow with more than $700 billion in aid, according to the Brussels-based think tank Bruegel, a state of emergency could last for years. With interest rates rising and economies likely already in recession, the support that cushioned the blow for millions of households and businesses is looking increasingly unaffordable.
Germany alone spent more than EUR 260 billion on energy support. That’s 7.4% of GDP! Italy and my own country are coming in second with 5.1%.
Note that this is happening after massive COVID spending and already stretched budgets and high debt ratios.
Even as gas usage has come down due to normal savings and lower recession-driven demand, it’s still too high.
With supply tight, businesses and consumers have been asked to reduce usage. The EU managed to curb gas demand by 50 billion cubic meters this year, but the region still faces a potential gap of 27 billion cubic meters in 2023, according to the International Energy Agency. That assumes Russian supplies drop to zero and Chinese LNG imports return to 2021 levels.
LNG is one of the tools to ease the pain. However, there is simply not enough production and export capacity in nations like the US, Qatar, and Australia. Even more, Asia is rapidly accelerating LNG demand as it looks to satisfy its own energy demand on top of decarbonization efforts. Add to this that China is reopening (higher demand).
Hence, we should not expect the energy situation to normalize until at least 2026!
European gas futures have averaged about €135 a megawatt-hour this year after peaking at €345 in July. If prices go back up to €210, import costs could reach 5% of GDP, according to Jamie Rush, chief European economist at Bloomberg Economics. That could tip the shallow recession being forecast into a deep downturn, and governments will likely have to scale back programs in response.
We’re now in a situation where governments will eventually be forced to choose between keeping the lights on in homes or factories.
I think we can all imagine what this means for the EU until 2026. Think of consumer sentiment, government spending, higher taxes down the road(!), geopolitical relationships, you name it.
Stay the course and Europe it's a moot point. Europe will not survive to 2026. Here's a thought. Stop sending weapons to Ukraine. Propaganda aside, they're not going to win this war. Sending weapons merely prolongs the suffering on all sides. Stand up for your own people and the Ukrainian people (and yes, the Russian people too) and broker a peace agreement. This isn't hard at all.
Great article that highlights the fact that eventually even the largest economies in the fiat ecosystem may have to make very hard choices. Something does not appear to be embedded in equity prices.
Thanks for the terrific post!