Europe Learns to Worry as Putin Pressures By


By Geoffrey Smith — Russia is set to invade a European neighbor for the third time in 14 years. Unlike the last two, this one could have a real economic impact. In August 2008, it didn’t matter to the global economy that Russia invaded Georgia. Oil prices were collapsing rapidly, but the world was far more concerned about the collapse of the US financial system.

In February 2014, when Russia invaded Ukraine, annexed the Crimean peninsula and established two small puppet states in the east of the country, the West noticed enough to impose a few sanctions but barely enough to move the dial.

Then, as now, the risks of applying an appropriate sanction for Europe’s most naked aggression since World War II were serious enough to preclude a convincing response. Threats to exclude Russian banks from the SWIFT international payment system were quickly dropped when the United States realized this could hasten the end of the dollar’s dominance in global financial markets. And a European Union still struggling with the aftermath of a sovereign debt crisis was in no condition to punish the Russian ruling class by selling them less alcohol, cars and luxury goods.

Europe’s economic vulnerability is again at the heart of the problem today. Only this time it’s more acute: Unless the continent can quickly tap into additional Russian supplies, it will almost certainly have to impose rationing by the end of winter. With household supply taking priority in such circumstances, it is industrial energy users who will be forced out of business – as they have been, in fact, by the quadrupling of spot market prices last year. last when the current crisis began to unfold.

All of this is possible as gas storage facilities in Europe are at their lowest on record for this time of winter, at just 46.8% full according to data from industry association Gas Infrastructure Europe. Normally, it takes until mid-February for typical seasonal drawdowns to reach this level.

Russia is withholding all but the bare minimum of gas from its European customers until Germany gives final approval to the Nord Stream 2 pipeline. quadrupled short-term futures last year.

However, the new German government – ​​and in particular its foreign minister, Annalena Baerbock – is less beholden to German industry than the previous one under Angela Merkel. And while Baerbock herself told a press conference that Russian gas will be needed for years as Germany transitions to cleaner energy, many of her Green Party colleagues don’t want that at all. the pipeline is put into service. For them, rising energy prices are a valuable tool to force buyers of fossil fuels to bear the costs of climate change that have so far been borne by insurers and taxpayers.

After the hit to industrial production, there will be second-round effects, both on consumer spending and on corporate balance sheets. Governments across Europe are already scared of the massive rise in household energy bills to come. Over the weekend, the French president ordered Electricité de France to sell more of its electricity at a very favorable price compared to market rates. EDF (PA:) shares fell more than 23%, their biggest one-day drop on record. In the UK, the lifting of the energy price cap in April threatens to end popular support for Boris Johnson’s government among the less well-off voters who put him in office.

In Italy, which imports almost all of its fossil energy, Mario Draghi’s government has already spent around €8bn subsidizing household energy spending since July and now plans to hit energy companies with higher taxes. . The country’s budget deficit could widen another 30 billion euros as the country tries to cushion the impact, according to Matteo Salvini, leader of the right-wing Lega party.

Spain’s socialist government is also planning clawbacks from the energy and utilities sector, but the risk in the eurozone is that slowing growth and a sharp rise in energy subsidies will blow another hole in public finances. A year ago, nobody would have cared, because the European Central Bank was willing to buy all of the net debt issued by eurozone states. But today, with inflation at an all-time high of over 5%, that seems less certain.

The ECB said it would likely start tapering its bond purchases from April and that no interest rate hikes would be needed this year. But bond markets are already betting – like the Federal Reserve – that it will be forced to tighten monetary policy faster than it expects in order to contain inflation.

This sets the stage for a noisy debate in Frankfurt over the next two months that will have repercussions on the bond, credit and equity markets. Anyone who, like Dr Strangelove, has learned to stop worrying in the past two years may – like the great scientist himself – find out that they were wrong in doing so.

Daniel K. Denny