“It may not be enough”
Over the last year, we’ve spilled a fair amount of ink covering the European energy situation, from the Calvinball surrounding Nordstream to last week’s article highlighting the potential for deindustrialization. While there was a bit of a sigh of relief as Europe passed the recent “stress test” of a cold snap, this week there are yet more indications that the energy crunch, the policy response, and secondary effects continue.
In Germany, “the future of energy supply is more uncertain than ever”. Building on the warnings from the past few weeks, “the country’s chemical sector, the most exposed to rising power costs, expects production to fall by 8.5% in 2022”, with the potential for “huge structural breaks in Germany’s industrial landscape”. Yet at the same time, “the combined tally of all Germany’s drives aimed at avoiding running out of power and securing new sources of energy” stands at “about 1.5 billion euros a day since Russia invaded Ukraine on Feb. 24. Or around 12% of national economic output. Or about 5,400 euros for each person in Germany.” As Michael Groemling at the German Economic Institute put succinctly, “The national economy as a whole is facing a huge loss of wealth.”
As Europe faces deindustrialization courtesy of energy pressure, it has also had to contend with some of the policy “carrots” being offered in the US. This was made clear in Macron’s push against some of the incentives created by the Inflation Reduction Act that gave “American companies an unfair advantage in the budding green energy sector”, and it is unlikely that the timing of the EU’s recently announced “carbon border tariff”, which would “impose CO2 emissions costs on imports of iron and steel, cement, fertilisers, aluminium and electricity”, i.e., “to apply the same CO2 cost to overseas firms and domestic EU industries”, is a coincidence. Meanwhile, the secondary effects of a few policy “sticks” are also becoming apparent. In just the last few weeks, we wrote about the various energy companies announcing decreased investments following the UK’s windfall tax. Now, whether it is a direct consequence of the flogging or a case of money going where it is treated best, Total has announced an $11 billion project in coordination with Aramco that will enable the conversion of “refinery off gases” and Aramco supplied inputs “into higher-value chemicals”.
P.S. The labor picture shown by state payrolls may not reflect reality if the Philadelphia Fed benchmarks are accurate. They show that the estimates may have been off by a cool million jobs.
P.P.S. It’s not necessarily “thinking about thinking about” changing the inflation target, but when asked about what would cause the Fed to “reevaluate that [2 per cent] target”, Powell said in the post FOMC press conference that “changing our inflation goal is just something… we’re not thinking about, and it’s something we’re not going to think about”. Olivier Blanchard had a different take here, saying that when “inflation is back down to 3 per cent, there will be an intense debate about whether it is worth getting it down to 2 per cent if it comes at the cost of a further substantial slowdown in activity.”
