The Global Economy: Europe


Global escalation of the crisis in Europe

There is now a widespread policy and call for EU countries to refuse energy from Russia, a topic that comes with no small amount of controversy, so let's break down the subject.

Although the United States, Britain, Canada and a number of other countries have stopped importing fossil fuels from Russia, Germany will try to temper expectations that such a move could happen quickly. Germany's main problem is its huge dependence on energy supplies from Russia (up to 55 percent of its gas supply and 34 percent of its oil supply, according to Agora Energiewende, a German think tank).

Although there were encouraging statements that Germany, with the help of maximum "national application of forces", will be able to abandon coal from Russia until the fall, oil - until the end of 2022, gas - until the summer of 2024. As far as this is possible, let's look into it.

In fact, this is a highly complex topic even for the best economists, although many still agree that at this point such a boycott of energy supplies from Russia would have an unpredictable cascade of large-scale consequences in production, both within Germany and across the EU.

Already, several industrial sectors have warned that a major disruption in production and supply chains could lead to massive job losses. These include the mining, chemical and energy industry union (IG BCE), the steel industry association (WV Stahl) and groups representing the steel and electrical sectors.

BASF's plant in Ludwigshafen, Germany, is the world's largest single-company chemical complex. The company produces 220,000 chemical products: basic compounds for pharmaceuticals, detergents for cleaning and cosmetics, adhesives, machine lubricants, ammonia for fertilizers and plastics for packaging, etc. Since European industry is closely intertwined, almost all European industrial sectors, including the French automotive, food and cosmetics industries, receive products directly or indirectly from Ludwigshafen.

The director of the Ludwigshafen complex, Uwe Liebelt, was already preparing for the fact that he would have to cut operations due to gas shortages. According to his calculations, if gas supplies fall by 30 percent, activity can be maintained at a technical minimum, but if supplies fall below the 50 percent threshold, the entire complex will have to be shut down and its 40,000 employees will be laid off.

"Germany is not ready for such a gas crisis. The discussions of the last few weeks have shown that," - Mr. Liebelt said.

Likewise, the lion's share of the burden of any energy boycott would fall on Germany's utility sector, whose representatives have warned of the enormous economic and social consequences.

Leonhard Birnbaum, executive director of German utility giant E.ON, told the television news program Tagesthemen that without Russian gas, the economy would suffer "enormous damage, which should be avoided if possible.

Kerstin Andrea, chairman of the German Energy and Water Association (BDEW), said the embargo would create "enormous, almost devastating problems.
Andrea said coal-fired power production would have to be increased, and households and commercial users would have to reduce their energy consumption. According to BDEW, household gas consumption could be reduced by 15%, commercial use by about 10%, and industrial use by 8%.

Michael Hufner of the Cologne Institute for Economic Research warned in a recent article for Tagesspiegel that an embargo would mean "the end of raw material production" in Germany.

To summarize the situation, former German Chancellor Gerhard Schröder stated: "Russia cannot be isolated in the long term, neither politically nor economically, and German industry needs Russian resources.

Europe is not yet ready for a complete boycott and its consequences, as the continent's gas grid is not designed to handle gas flows from west to east - meaning the channels through the Netherlands and Belgium, which operate liquefied natural gas (LNG) terminals and could in theory handle new supplies from the United States, Qatar and Norway.

German Economy Minister Robert Habek recently visited other major gas exporters, Qatar and Norway, to reinforce future possible energy supplies. However, Germany has no terminals to receive imported LNG, which is the main alternative to Russian natural gas, which is currently mainly supplied by pipeline. New facilities may not be commissioned until 2026 at the earliest.

Germany is working to reduce its dependence on Russian energy resources, but it will take at least 2-4 years to reach the desired result (energy independence) according to the most conservative estimates.

The sudden disruption of energy supply may also come from Russia, which announced last week that in the future it will only accept payment for fossil fuels in rubles. Although Russia has met its contractual obligations so far, wholesale gas prices have recently risen again in anticipation that the Kremlin might be the one to turn off the taps.

Because of rising energy prices, the EU is actively depleting its strategic reserves by actually emptying storage facilities, which means that at some point they will have to pump them up just as fast, which will push the price up again.

Natural gas reserves in Germany

Prices for marine diesel fuel

Price of electricity (Euro per MWh), France

Small Bottom Line

It is extremely doubtful that Germany will be able to refuse supplies of energy from Russia, the volumes are too large and too short a period for such a large-scale conversion or construction of the necessary infrastructure. Germany will give up Russian energy, but not in the next 2 years.

Inflation in Germany is already, according to official sources, 7.3 percent per year (how much is actually a curious question). The last time such high rates were recorded in the FRG more than 40 years ago.

The economic situation is not getting any better, which is generally expected given the logistics problems and the massive rise in the cost of everything from food to resources.

In the current state of affairs, it would be very logical for the EU countries to weaken their sanctions against Russia or make concessions, which would significantly alleviate the current problems.

That's all for now with Europe, if you are still enthusiastic and want to continue to understand the economic situation, then I suggest you wait for the next part of this article, where we will talk about Russia.

Keep your nose in the wind Friends and may fortune always be with you ;)

Always yours, C.J.

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