To The Moon

The war in Ukraine has mostly negative consequences for Europe. The Americans are actually a net exporter of energy and the Chinese benefit from cheap energy due to the close relationship with Russia. The problem is bigger than just the high energy prices due to the boycott we imposed ourselves. We made sure that Russian money earned from energy supplies to Europe disappeared. No more Russians buying homes in European capitals or in the luxury resorts on Europe's coasts. No more Dutch or German superyachts for Russian oligarchs. No more Russian accounts where all those proceeds are deposited either. No more British football clubs as a hobby. From now on, Europe will buy Qatar's natural gas, if we at least stay 'on speaking terms' with the Qatari. All ESG principles have rapidly gone overboard. In itself, this seems logical; after all, you can hardly fight two wars at the same time. The war in Ukraine currently takes precedence over the war against the climate crisis.

Unfortunately, Europe has pinned all its hopes on LNG. Liquefied natural gas produced elsewhere in the world has higher CO2 emissions over its life cycle than, say, coal-fired power plants. First of all, a lot of natural gas is released when producing natural gas, also because the equipment needs to be blown through from time to time. Methane is a component of natural gas and a much stronger greenhouse gas than CO2. Furthermore, a large amount of the extracted natural gas goes into cooling it down to LNG. Then it still has to be transported. Moreover, all those plants through which it is transported take many decades to depreciate, well beyond the date when we are supposed to be CO2 neutral. That is a coal-fired power plant runs for only three years, for example, and then switches to wind or solar power, the CO2 emissions are much lower. Soon Europe will be stuck with expensive LNG contracts for decades to come, with no benefit to the environment or the climate.

European consumers are extremely gloomy at the moment. Inflation is at its highest point in 40 years, there is war in Ukraine, and energy shortages loom when the winter is cold. So far, that poor sentiment is not translating into disappointing hard macroeconomic data. This is also because European governments are doing all they can to avoid consumer setbacks. Moreover, the labour market is still tight in parts of Europe, which means that macro-economically, the drop in purchasing power is not that bad. There are also an increasing number of retirees receiving income from pensions. Furthermore, people in Europe were also able to save during the coronapandemic. The savings rate went from a fairly stable 12 to 14 per cent to a whopping 25 per cent in the second quarter of 2020.

Yet the picture in Europe will continue to deteriorate. Energy prices will remain high for longer than necessary, given all the overpriced gas in storage. Furthermore, the labour market will also relax here, not only because the economy is getting worse, but also because labour is nowhere as expensive as in Europe. Nevertheless, if entrepreneurs want to grow, they had better start investing in automation and robotisation. Inflation has also caused many wealth effects (higher savings, government support) to be lost. Moreover, the recent rebound in the services sector is largely due to catch-up effects (weddings, company parties, anniversaries combined with finally going on holiday again, etc.). Economic growth is still high this year, but that only means the recession will soon feel much deeper next year. 

Furthermore, European policies have meant that a large proportion of energy-intensive companies simply cannot survive this crisis. Many of these companies are part of a chain and that means supply problems again. Moreover, these businesses are likely to disappear in countries/regions where energy is cheap (US or China). That means Europe will also miss out on some of the recovery potentials. This economic growth is needed to keep the European welfare state afloat. Moreover, since the introduction of the euro, the growth differences between the various countries are very large, which creates instability.

Europe had a current account surplus for many years. There is a high risk that Europe will run a structural current account deficit. The money from the Russians will not return and the Arabs will also be less keen on actually stashing petrodollars earned in Europe. The transition to electric cars is also crippling for the trade balance. Perhaps those cars will still be made in Europe, but the most valuable part (the battery) will almost always come from Asia.

Expensive labour and energy make it difficult for European companies to compete on the world stage. That while dollars have to be earned to import energy. For now, the euro is seen as the anti-dollar, as the ECB is expected to raise interest rates even after the Fed's pivot, but given the structural weaknesses of the European economy, that would be monetary overkill. These developments also make the euro structurally weak, unlike Asian currencies.