Euro Winter, Euro Weakness

Energy has become the Euro trade. As the negative impacts of the Ukraine War and bad European policy and planning increase the prices of fuel, it drastically impacts production and increases the burden of costs on households. As Britain and Europe play catch up with inflation fighting and raising interest rates to keep pace with the U.S., exploding energy costs are keeping downward pressure on Eurozone currencies. United Kingdom energy prices will jump 80% this winter according to energy regulator Ofgem, or GBP 3,549 per year to heat and power their homes.1

These costs are second to Czech Republic, and nearly double what French citizens are paying. Almost every European country is implementing these inflationary policies by subsidizing citizens for these hardships or cutting VAT tax on natural gas. The issue Europeans must grapple with is how they traded their energy security to Russia and climate ideals, without alternate supply chains, with aging nuclear energy, and for a global climate agenda.

In 2018 President Donald Trump addressed the United Nations General Assembly and stated, “Reliance on a single foreign supplier can leave nations vulnerable to extortion and intimidation and that is why we congratulate European states such as Poland for leading construction of a Baltic pipeline so that nations are not dependent on Russia to meet their energy needs." Poland had constructed the Baltic Pipeline to be energy independent from Russia, as their memories of Russian occupation were still fresh in their minds when they made policy. The Germans delegation reacted with laughter.

Germany was receiving 55% of its natural gas from Russia. “They offered very cheap gas prices, and that was very attractive. And this is why we’re in this mess,” said Professor Claudia Kemfert, head of the department of energy, transportation, and environment at DIW, the German Institute of Economic Research. What has happened was predictable. I have been predicting it for the past 15 years,” she said.2 Polish Deputy Foreign Minister Pawel Jablonski said “We told them so. Some countries have been warning of this situation and have been much better prepared,” he said.3

German lawmakers are now planning to burn coal, which was never supposed to be part of any green energy strategy. Germany has phased out their nuclear energy program and has extended the deadline of reactors they planned to shutter. Deutsche Bank is suggesting Germans burn wood instead of gas for heating this winter.

The NY Times reported Germans are clear cutting ancient forests and grinding them up into wood pellets in the name of renewable energy.4 “People buy wood pellets thinking they’re the sustainable choice, but in reality, they’re driving the destruction of Europe’s last wild forests,” said David Gehl of the Environmental Investigation Agency, a Washington-based advocacy group that has studied wood use in Central Europe.5

Some of Germany’s biggest energy users, from steel to chemical companies, are cutting back on production, and business leaders are warning that soaring prices risk eroding the economy’s competitiveness. ArcelorMittal, Europe’s largest steelmaker, said this month it would switch off one of the blast furnaces at a steelworks in Bremen, northern Germany. “The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus,” said Timo Wollmershäuser, senior economist at Ifo.6

The story is similar for the French, as they announced in September that they will allow the Eiffel Tower to go dark for additional hours to conserve electricity. A factory making iconic French bistro glasses is idling its furnaces to offset soaring energy costs. Cities around France are turning off streetlamps and other outdoor lighting to curb electricity use. In Normandy, some schools will start heating classrooms by burning wood to conserve natural gas.7

France would seem to be less vulnerable than its neighbors: It boasts the biggest nuclear energy arsenal of any European Union country, and is one of the least reliant on Russian natural gas. But France faces an energy crisis of its own, as its nuclear industry addresses cracks, corrosion and other troubles that have forced EDF to temporarily shut down 32 of France’s 56 nuclear reactors. In June French PM Macron, a champion of green policies, opened a shuttered coal energy plant going back on his pledge from 2018 to end coal energy.

The harshest critics of European energy policy have recently come from Belgium. “The risk of that is de-industrialization and severe risk of fundamental social unrest.” Belgian Prime Minister Alexander De Croo warned that Europe needs to act immediately to address the energy crisis or risk the kind of fundamental economic shutdown that the bloc would struggle to recover from. “I honestly do not see any other choice than doing market interventions,” De Croo said. “We don’t get a second chance to prove as 450 million Europeans that we take things in our hands. What you are seeing today is a massive drainage of prosperity out of the European Union.”8 “This is, of course, not a crisis that (Russian President Vladimir) Putin has caused, but that Europe has brought on itself by phasing out its own primary energy production this century,” he asserted.

He explained that exploitation of oil, gas, and coal reserves was not allowed while “the dumbest countries, Germany and Belgium, have phased out nuclear energy in parallel.” Bart De Wever, the Mayor of Antwerp added, “Belgium is bankrupt, we are the new Greece,” he underlined, adding that his country's public debt and government spending show a worse balance than in most of the Southern European countries that are often blamed for disrespecting budgetary discipline.

According to De Wever, Europe now must deal with the consequences of “pushing away all energy sources, making ourselves dependent on Putin.” “In America, people are not in this mess,” he added, asserting that the US has become an oil and gas exporter in 20 years. At the same time, he pointed out that EU climate standards are hypocritical because European “companies go to America and China to produce, then you are bankrupt, and the climate is not saved either.”9

In the United Kingdom, the energy crisis has seen a rise in defaults due to the energy crisis, which has strained the British financial industry. The new UK PM Liz Truss ended fracking ban to increase available oil. PM Truss is also proposing a bailout of GBP150 Billion to temporarily cap the prices of energy for households. The Prime Minister hopes this stems the tide of businesses being forced to close due to high energy costs. This plan has been explained as an inflation fighting proposal, to keep prices down for businesses and consumers. Economists would say borrowing money, especially in periods of high inflation, will mostly add to inflation as it is expansionary fiscal policy, increasing demand and not supply. Nearly one in four households in the United Kingdom plan on keeping the heat off this winter.10

Most of the energy issues the British face is due to the government run electricity, which contrasted with their natural gas supplies are privately owned. UK prices have been higher than the EU average for at least five years, with the gap widening in the aftermath of the COVID lockdown and the war in Ukraine. A regulated UK energy market is more susceptible to price shocks, due to the lack of competition. Additionally, gas prices are higher in the UK than in Europe despite importing only a small amount of Russian gas. This is due a heavy reliance on natural gas, as the British have a smaller amount of nuclear energy, renewables, and less capacity to store natural gas.11