Economy and energy: Europe will have to make a choice

Economy and energy: Europe will have to make a choice

Already more than two months ago during our overview of Europe, we were notably income on the strengths of the Old continentwho gave us outstanding performance in this beginning of the year 2023more about them too energy risks inherent in the Ukraine-Russia conflict.

So, what are the latest news from the Old Continent? This is what we will see today.

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Recent US laws weighing on European industry

The European financial system has recently adopted Banking storm without a hitchwhich paves the way for a further rate hike. This storm was even beneficial. Banking tensions have increased the risk premium, and therefore the cost of bank funding. The increase in the cost of financing for banks forces them to lower their credit standards and reduce the number of new loans granted.

Inflation is still high in the euro zone. The ECB should therefore continue to tighten.

Economy and energy: Europe will have to make a choice
Inflation in the euro zone, 6.9% in March 2023

Although a first banking storm has passed, the ECB and other central bankers going to have to be three attentive to the latest news. For now, the ECB has reason to believe that the banking turbulence is temporary, but the growth forecast is particularly high.

A former senior official of the Banque de France even described the spies of the ECB as “heroic”.

I’Inflation Reduction Actone of those passed by Congress in August 2022, is a major reform project to enable the USA to achieve their ecological objectives. This law also provides for measures to reduce the cost of health carein particular that of the elderly.

Yes, we are still talking about the USA in this part devoted to Europe. But you know that American decisions have a big impact on European industries.

The problem with this law for Europe is that the subsidies these are not verses only for products made in the USA. Enough to favor Tesla over electric Mercedes, for example. European companies could relocate to the USA in order to manufacture on American territory and take advantage of these subsidies.

Nevertheless, ecological and social objectives are not the only ones to cross theInflation Reduction Act. United States also want reduce dependency with regard to “worrying foreign entities”namely, China, Russia and their allies.

The path the US is taking to undercut mainland China in the clean energy sector is increasing competition for raw materials.

You FinancialTimes report that Washington a proposal of several minerals eligible to make subsidies if mined or processed in the EU. The problem is that it will take some time for an increase in mining capacity to come online on the Old Continent. And nothing seems to have been added on the production and assembly side of batteries and electric vehicles. Thus, brands, such as Tesla, will have a clear advantage in the electric vehicle market in the USA.

In short, that ” cold War ” between China and the USA goes against Europe to choose a side. The Netherlands has already made a choice, banning the export of certain semiconductors to China at the beginning of 2023.

“Europe should reject Washington’s demands to cut trade with Beijing. »

Statement by a senior Chinese diplomat

An important visit

On his side, Von der Leyen (President of the European Commission) calls for reduce risk » in European relations with China. The risk is there general reduction in trade with China if Europe is suitable for USA. The business model is lost for Europe.

Emmanuel Macronduring his recent visit to China, he said:

“The paradox would be that, seized with panic, we believe that we are only the followers of America. The question that Europeans must answer is: do we have an interest in accelerating a crisis in Taiwan? No, the worst thing would be to think that we Europeans should become followers on this subject and take inspiration from the American agenda and an overreaction from China. »

While the debate rages around the dedollarization of the world, as we had already discussed it, Emmanuel Macron amplifies this message. He also suggested that Europe should reduce its dependence on the extraterritoriality of the dollar, a common goal with Moscow and Beijing. The concept of strategic autonomy, evoked by Emmanuel Macron, is enthusiastically endorsed by the Chinese Communist Party.

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Some European countries are overwhelmed by this war

Some European Union countries know that the current level of aid to Kyiv is not sustainable over time, including the home of the President of the Czech Republic, Petr Pavel:

“After the winter strikes, it will be extremely difficult to maintain the current level of assistance. War fatigue is not only the depletion of human resources and equipment, the destruction of infrastructure in Ukraine, but also the fatigue of countries providing aid. »

Slovakia has also sent its military equipment to Ukraine. 13 MiG-29 aircraft were donated to the Ukrainian army, according to Reuters. For this small country, this is a considerable effort. These aircraft represent a large part of the Slovak Air Force.

Slovakia has also sent its military equipment to Ukraine.  13 MiG-29 aircraft on Ukrainian Armed Forces
A MiG-29 aircraft model

CBS at I watched that Zelensky ‘seemed very aware of the risk that these are countries that will see the vital bra of the West (and especially the US) fade as the war drags on’.

While we face escalating tensions between the United States and China, through the Taiwanese intermediary, the United States has now focused on managing this war that has raged around the Russian-Ukrainian conflict. Yes, Europe will have to take overif she asked him… Which is not won, as long as the help of the USA is important.

If we come to have an escalation of tension between the United States and China, via Taiwan, then the United States focuses first on this war rather than the Russian-Ukrainian conflict.  Thus, Europe will have to take over, if it can… Which is not won, as long as the help of the USA is important.
Countries contributing the most aid to Ukraine – Source: Statista

Energy: the sinews of war for Europe

There natural gas consumption in the European countries of theOECD For 13% shooting in 2022, the IAE said in its first report of the year 2023.

Energy change, economic activity, weather conditions and consumer behavior are the reasons cited in this report.

In 2023, total gas consumption is expected to decrease by more than 4%. The increase in solar and nuclear production has reduced gas consumption in the electricity sector.

In industry, gas consumption has fallen by more than 25%.

Reduction of gas demand in Europe
Gas consumption in the OECD – Source: IAE

But the situation for this year 2023 looks more tense. The supply course hasn’t actually started yet, and theEurope will face tougher competition from theAsia for the supply of liquefied natural gas. TTF futures prices for December are quoted at 56.8, while futures for this month are quoted at 41.

TTF futures contracts are used for pricing natural gas futures and have become the primary benchmark for natural gas futures contracts in Europe.

Euro TTF Futures Prices
Euro TTF Futures Prices

“The price looked likely to remain structurally higher than they were before the Russian invasion. »

Statement by Henning Gloystein, Director of Energy, Climate and Resources at Eurasia Group

A risky bet?

For the moment, the bet on renewable energies has paid off for Europe. The production of solar and wind electricity in Europe will reach a record in 2022. For the first time in history, wind and solar combined have produced more electricity than natural gas-fired power stations.

What compensate for the drop in hydroelectric and nuclear production, which fell sharply during this time.

Our planes together, in 2022, major droughts, threatening major trade routes and drastically reducing hydropower generation. We can take the example of Spain where the production of hydraulic electricity has been reduced by half due to the drought, according to Bloomberg.

Much of the hope rests on nuclearwhich represents 25% of electricity production in theEuropean Union.

Much of the hope lies in nuclear power, which accounts for 25% of the European Union's electricity production.
The nuclear share of electrical energy production – Source: Eurostat

I’Germany, which has already faced a tough winter due to the share of natural gas supply from Russia, just shut down its last three nuclear power plants a few weeks ago. At the same time, the German electricity multinational E.ON increased its tariffs by 45% on June 1.

“On certain holidays in North Rhine-Westphalia, the new price is 49.44 gross cents per kilowatt, which means an environmental adjustment of 45% for everyday consumption.”

Statement from an E.ON spokesperson

It’s almost ironic that last winter’s shortages forced the German government to increase the number of coal-fired power plants, only to explain that it is closing its nuclear plants to make way for renewables.

According to a report by the Think Tank Bruegel, the countries of the European Union on the spent €681 billion to protect businesses and households from soaring prices. I’Germany is the highest spending country with 270 billion euros. The situation is therefore not sustainable, and Europe will have to find a solution to cope with next winter.

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