The EU cannot escape recession

While EU officials are optimistic that the EU will eventually survive the challenges of winter, rising energy prices continue to drive inflation, a reality that European consumers cannot escape

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Text | Caijing reporter Cai Tingyi

Edit | Hao Zhou

On July 26, Gazprom announced that "due to engine-related technical problems", the daily natural gas delivered to Germany via Nord Stream 1 will be reduced from 27 to 20% of the normal volume, and the price of natural gas in Europe will instantly climb by about 2%.

Gazprom had just completed ten days of repairs to the Nord Stream 1 pipeline less than a week ago, restoring 67 million cubic meters of natural gas per day, just 40 percent of the normal supply before the outbreak of the Russian-Ukrainian conflict. Although the supply cut-off, which European Union countries, including Germany, feared most about under the pretext of indefinite maintenance did not occur, they decided that it was only a matter of time before Russia completely cut off gas supply. By the end of 2021, 40% of Europe's gas supply will come from Russia.

Since the conflict between Russia and Ukraine on February 24, European countries have imposed embargo sanctions on Russia, and Russia has waged a commodity war on European countries from energy to food, triggering the eurozone's worst inflation since 1999.

Compared to the easier diversification of food sources, EU member states are facing an urgent energy crisis and negative economic effects due to energy scarcity. People are worried about heating in winter, weaker business confidence, and a recession.

Even more challenging is whether EU member states can unite in the face of the energy crisis. On July 20, the European Union launched a joint 15% reduction in natural gas use, hoping to achieve the goal of a smooth winter, but the proposal was once questioned and opposed by southern European countries. EU President von der Leyen pointed out that Russia uses gas supplies as a weapon and the EU needs to cooperate to resist together.

Dionis Cenusa, a political risk analyst at the Center for Eastern European Studies, a Lithuanian think tank, pointed out that while the EU has tried to punish Russia with an embargo, the global economy is interdependent, especially as Europe has relied on Russian gas for many years, and Russia has naturally "weaponized" its gas supply in response to EU sanctions.

On July 26, the energy ministers of EU member states reached an agreement at an emergency meeting to reduce the use of natural gas by winter, temporarily avoiding member states-for-tat because of the energy gap. Under the agreement, member states will reduce their natural gas consumption by at least 15% by as much as possible by March 2023.

However, the International Monetary Fund (IMF) warns that Hungary, Slovakia and the Czech Republic could be the hardest hit by the lack of a complete response, with an energy shortage of 40 percent that would cause a further 6 percent decline in the gross domestic product (GDP) of these Eastern European countries.

Covet cheap resources

Fabian, a Longtime Beijing-based German who returned home in May 2022 to visit his family, found an anxiety he had never seen before pervade a German society that had been quiet for years. He pointed out to the "Finance" reporter that from family, friends to strangers encountered in bars are complaining about high prices, the price of bread, pasta and vegetables for basic daily needs has risen by 20%-100%, "the whole new generation thinks that the crisis is distant, but under the influence of the crisis, people seem to be a little anxious."

Inflation in Germany reached 8.7 percent in May and slipped slightly to 8.2 percent in June, but still hit a new high since the 1973-1974 oil crisis. Since the reunification of East and West Germany, cheap migrant labor and energy have allowed German society to live in complete comfort for decades. "This is the first time they need to think about heating in the winter and worry that they may need to wear more clothes at home in the winter." Fabian told Caijing.

The German government and businesses have deepened their dependence on Russian gas over the past 20 years, and the share of Russian gas in German gas use has increased significantly from 30% to 55% in the past 20 years. Germany also quickly announced the closure of nuclear power plants in 2011 as a result of the earthquake in Japan, and the last three were scheduled to be completely shut down in December 2022.

After years of dependence on Russian gas, German companies, months after the outbreak of the Russian-Ukrainian conflict, are still reluctant to face the fact that they need to find alternatives. German union president Yasmin Fahimi even warned in early July that German industry, from glass to chemicals to aluminium, could collapse permanently if Russian gas supply is cut off, which will have a serious impact on jobs and the economy.

Russia, which is well known for its dependence on Russian gas, has been manipulating the mood of Germany and the rest of the EU through the transmission of gas over the past few months. Since the outbreak of the Russian-Ukrainian conflict, Russia has first reduced its natural gas through Nord Stream 1 by 60%, and then it has become a landmark event about how long the ten-day routine maintenance from July 11 will eventually drag on. Klaus Mueller, director of the German Federal Networks Bureau, who was in charge of energy before the repairs, pointed out that "the question now is whether the maintenance of Nord Stream 1 will eventually turn into time-consuming political repairs." ”

According to Robert Habeck, Deputy Chancellor of Germany and Economic Minister, "No one knows what will happen after the repairs ... until the last day of the repairs, there will probably be no answers ... we have encountered an unprecedented challenge ... any outcome is possible ... or when the delivery is resumed, the volume will be higher, but it may not be anything, so we still need to prepare for the worst." ”

Unexpectedly, Nord Stream 1 resumed supply as scheduled after ten days of maintenance, but the supply was only 40% of the original; As the EU discussed its next energy plan, Gazprom announced that it would reduce its transmission capacity to 20 percent.

Claudia Kemfert, an energy expert at the German Institute of Economic Research, has repeatedly warned German politicians over the past 15 years that they should avoid over-reliance on Russian energy, but her voice has been repeatedly ignored. She strenuously opposed the construction of Nord Stream 1 but her opinion was not taken into account, and now The constant warnings of Kemophirth have become a fact. She told the media, "Hopefully, what is happening now will never happen." ”

German companies, which once insisted that there were no alternative energy sources, announced alternative energy use options as Russia cut off gas supplies became a fact. Mercedes-Benz announced it will reduce its use of natural gas by 50 percent.

The German government has also been forced to consider the possibility of alternative energy sources, including middle eastern crude oil, coal and the suspension of nuclear power plant abolitions.

German Chancellor Schoerz said he would reconsider the existence of nuclear power plants, and the coalition government's finance minister, Lind, was open to continuing to use nuclear power. However, the German government only relaxed its adjustment in the countdown stage in the winter, and was teased by many energy experts that it "finally woke up".

Reduce demand together

With different energy supplies and demands from EU member states and different dependence on Russian gas, the anxious market has pushed gas prices six times higher in the first quarter of 2022 since the outbreak of the Russian-Ukrainian conflict.

On July 20, the European Union launched the "Save Gas for a Safe Winter" program, hoping that member states will reduce the use of natural gas by 15% from August 1 to March 31, 2023. When the plan was launched, it was once opposed by southern European countries such as Portugal and Spain, and the issue was believed to once again pull the EU back to the traditional model of "north-south confrontation". However, after an emergency meeting of the energy ministers of the member states on July 26 and the EU revised the implementation details, the member states reached an agreement to jointly reduce the use of natural gas by 15%.

The European Union has set member states to store 80 percent of their natural gas by November 1. According to Western Union and Oxford Economics, by the end of July, the average EU stockpile was 66.7%, of which Portugal was 100%, Poland was 98.6%, and Germany, the Netherlands, Austria and Hungary were still below the EU average.

In order to achieve the goal, major cities such as Germany, Austria, France, Italy and other countries have dimmed the street lights on urban streets or adjusted the use of lights in public spaces, while Spain requires shops to turn off the lights at night. Electricity prices in these countries have risen sharply with the rise in natural gas prices.

In contrast to Germany's long-held hopes for the supply of the Nord Stream pipeline and relatively negative about reducing demand for natural gas, Finland, which has applied to join NATO, has launched a new nuclear power plant in time and has cut gas demand by 50% since February, although it has been cut off by Russia since May. Other figures show that Lithuania and Latvia cut gas use by more than 30% month-on-month in April-May, with the Netherlands, Poland, Sweden and Denmark cutting more than 20%.

Considering that not every EU country is as proactive as Finland, the EU should adopt four strategies for energy shortages: reducing demand, increasing gas storage levels, diversifying energy supplies, and implementing a rationing system if necessary.

LNG, which currently accounts for a quarter of the EU's energy use, is a major focus of the EU's diversified imports. In March, U.S. President Joe Biden pledged to increase LNG exports to Europe to help europe wean itself off its dependence on Russia.

Based on the willingness of European countries to pay high prices, the US liquefied natural gas company will shift a large number of exports to Asia in 2022 to Europe. According to data firm Refinitiv, Belgium's imports of U.S. LNG in the first half of 2022 increased by 658% compared to the same period in 2021, Spain by 333%, and Greece by 216%. The EU is also in talks with Nigeria to double its LNG imports from Nigeria. LNG exports to the EU market originally accounted for 14 per cent of Nigeria's total exports.

In addition, the EU signed a "Strategic Energy Partnership" agreement with Azerbaijan on July 18, which will provide 20 billion cubic meters of natural gas per year by 2027. Azerbaijan has raised its gas exports to the EU this year, from 8.1 billion cubic meters last year to 12 billion cubic meters this year.

EU Energy Commissioner Kadri Simson told German media that the EU is "optimistic" that Europe as a whole will be able to get through the winter.

However, Ben McWilliams, an energy analyst at Brugel, an economic research think tank in Brussels, told Caijing that if the EU fails to save energy, EU members may be divided on energy issues, and the sanctions decision against Russia will be weakened. "If Europe fails to meet its energy efficiency targets, it will be forced to save energy even further in winter. A warm winter will help a lot [in Europe's woes], but an extraordinarily cold winter will be Putin's best ally. ”

A rate hike could lead to a recession

While EU officials are optimistic that the EU will eventually survive the challenges of winter, rising energy prices continue to drive inflation, a reality that European consumers cannot escape.

The Russian-Ukrainian conflict has further exacerbated inflation that was already triggered by the COVID-19 pandemic.

The Eurozone's Consumer Price Index (CPI) rose 8.6% in June 2022, climbing further from 8.1% in May and only 1.9% in June 2021. The EUROPEAN Union's CPI rose 9.6% in June, up further from 8.8% in May, with countries with lower CPI in June including Malta (6.1%), France (6.5%) and Finland (8.1%), with the baltic countries being the highest, with Estonia (22%), Lithuania (20.5%) and Latvia (19.2%).

According to statistics, the price of unprocessed food in the EUROPEAN region rose by 11.1% in June, and many analysts believe that they have not yet reached the high point. The IMF estimates that the average cost of living for European households in 2022 will increase by 7% compared to 2021. Overall figures show that high energy bills affect low-income households much more than high-income households. Statistics show that the cost of living for the bottom 20% of households in the UK and Estonia will increase twice as much as the top 20% of households.

In Germany, for example, which is more affected by energy, the consumer price index released on August 10 showed that the German food index increased by 14.8% month-on-month in July, of which dairy and eggs rose by 24.2%, meat and processed meat rose by 18.3%, and edible oil rose by 44.2%. In addition, in terms of electricity bills, the German Federal Housing and Real Estate Organization roughly estimates that compared with 2021, the electricity bill of a single-person residence in 2022 will reach 2749 euros (about 19117 yuan), and the four-person family will reach 5074 euros (about 35285 yuan).

Soaring household bills and stagnant wages have sparked protests from workers in EU member states. According to economist Andreas Larson' estimates, the slow rise in inflation and wages has caused the real value of salaries in Germany to return to a decade ago. But employees can only achieve salary increases by pressuring their employers, and Lufthansa ground staff who went on strike at the end of July finally reached a 13.6%-18.4% increase agreement with management on August 4.

In order to help the German people save the cost of living, Germany began to issue a monthly pass of 9 euros a card in June, the program is planned to be implemented for three months, before the end of July has sold 21 million tickets, the result of too much active use of the train overcrowded, often need to invite some passengers to get off. On July 4, German Chancellor Scholz met with several German workers' groups and invited workers' groups, academics, and the Bundesbank to discuss countermeasures.

How to help low-income families tide over the difficulties has become the focus of attention of EU countries. Peter Bofinger, a professor of economics at the University of Würzburg, pointed out that the government should provide low-interest loans to low-income families guaranteed by the government. He designed a loan scheme with an interest rate of 2%, five years to pay off, the first two years without repayment, the amount of money that can be provided to individuals is 2750 euros, the amount of three-person families can be increased to 4624 euros, and the four-person family can be further increased to 5074 euros. He believes the program would give low-income households more time to deal with the difficulties of the energy bill surge.

Ulrich Kater, chief economist at DekaBank, told the media that inflation will not ease for the time being and will remain around 7% until the end of the year.

To rein in inflation, the ECB announced a 50 basis point rate hike on July 21, while hinting that it would not rule out adding another 25 or 50 basis points in September, and like the Fed, the ECB faces the dilemma that a rate hike could lead to a recession.

According to the analysis of The German Berenberg Bank, inflation will slowly ease by the end of 2022, but the EU will face a recession in late 2022 and early 2023, and by 2023 , "the recession and easing of inflation will be very obvious, and there will be no more interest rate hikes", and the recession will end in mid-2023.

Benefiting from the post-epidemic tourism boom, the latest data show that the GDP of the European Union grew by 0.7% in the second quarter, of which Italy and Spain increased by 1% and 1.1% respectively. However, the European Manufacturing Index has fallen significantly, with the S&P Global Markets Financial Intelligence Manufacturing Managers Purchasing Index showing a decline of 49.8 in July, a new low since May 2020.

Japan's Nomura Securities believes that the EU economy will begin to decline in the second half of this year until the summer of 2023. Nomura Estimates EU GDP will decline by 1.7%.