By Alex Krainer [from Substack]
The situation in Europe is evolving at such a breakneck pace that it is getting more and more difficult to keep up with events. Earlier this week Helge Haugane, a senior executive at Norway’s energy giant Equinor warned earlier this week that “European energy trading risks grinding to a halt unless governments extend liquidity to cover margin calls of at least $1.5 trillion.” The magnitude of this problem can be better appreciated by comparison with the Lehman Brothers moment in 2008 when ‘only’ $600 billion was required to cover margin calls. Haugane suggested that, “liquidity support is going to be needed.” Liquidity support is a polite name for bailouts. According to Goldman Sachs, the cost of energy for Europe could vault to €2 trillion, fully 15% of the block’s shrinking GDP and 20% of EU households’ disposable income.
Back to the USSR?
The rapidly deteriorating situation has given rise to a now palpable sense of panic among the hapless policymakers. Just in the last few days, the UK’s new PM announced a 130 billion pound plan to subsidize energy costs for the nation’s households and businesses. The new cabinet’s new plan is for the utility companies to keep their bills low and for the government to pay out the difference back to them. In Germany, Olaf Scholz announced a 64 billion euro stimulus to fight energy price inflation, but the Eurocrats are looking at a different model: they plan to impose windfall taxes on energy providers in order to help pay for the subsidies to households and businesses. There are all kinds of problems with both approaches. In the UK’s case, it incentivizes the utilities to max-out energy prices, since they will be able to rely on government largesse. The German approach by contrast punishes utility companies by depriving them of profits. Longer term, this disincentivizes capital investments that could add energy producing capacity.
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Hand over your profits, comrade!
Regardless, Chancellor Scholz’s government is pushing for their scheme to be enacted at the EU level. Unsurprisingly, just yesterday European Commission’s unelected president Ursula Von der Leyen announced just such a plan: “We will propose to cap the revenues of companies that are producing electricity with low costs. The low carbon energy sources are making these times, because they have low costs but there are high prices on the market, enormous revenues. Revenues they never calculated with, revenues they never dreamt of, and revenues they cannot reinvest as far. These revenues do not reflect their production costs, so it is now time for the consumers to benefit from the low cost of the low carbon sources, like for example, the renewables. We will propose to re-channel these unexpected profits. We channel them to the member states so that the member states can support the vulnerable households and vulnerable companies.” At the same time, Von der Leyen announced that “we” will also “flatten the curve” of the energy demand via a “mandatory target for reducing electricity use at peak hours.”
In other words, the energy producers shouldn’t enjoy the profits they didn’t even expect, the polit bureau will take care of redistributing those windfalls to the vulnerable sectors of the society. All good intentions, all for the greater good, so the blunt political intervention in energy markets is wholly justifiable. Going forward, I believe we can predict the long-term impact in the financial markets: the measures might help lessen the social revolt somewhat, but the consequences will be felt in the economy for a long time with more inflation and further decline in the euro. Not to worry, it’s nothing that can’t be fixed by printing up more currency (in all seriousness, Olaf Scholtz‘s 65 billion euro stimulus was tagged “inflation fighting” package). You couldn’t make any of this up – it takes a special kind of stupid to contrive. What’s worse, once the Eurocrats get the taste of political interference with the markets, they will surely not resist the temptation in the future – this truly is a creeping Sovietization of the EU economy.
More on Liz Truss’ popularity
Yesterday I published a note titled “Britain’s fake democracy: what you need to know,” in which I asserted that, “I doubt whether many Britons expect anything much from the new PM. If anything, she is almost universally despised.” The recent YouGov poll shows that she’s hardly an improvement, at least so far as the public perceives her (more details at the link).