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Europe Has Lost The Energy War

Posted by M. C. on August 2, 2022

Is Russia weaponising the flow of gas in its tug of war with Europe? Of course it is. But Europeans started this game.

Tyler Durden's Photo

BY TYLER DURDEN

Authored by Thomas Fazi via UnHerd.com,

https://www.zerohedge.com/geopolitical/europe-has-lost-energy-war

After a decade of financial austerity, is Europe now on the brink of a new age of energy austerity? The city of Hanover has recently introduced strict energy-saving rules that include cutting off the hot water in public buildings, swimming pools, sports halls and gyms, banning mobile air conditioners, fan heaters or radiators, switching off public fountains, and stopping illuminating major buildings such as the town hall at night.

Meanwhile, several countries across Europe are considering dimming or switching off public lights, and even adopting “energy curfews”with early closures for businesses and public offices. And more drastic measures are under consideration — including gas rationing for energy-intensive industries such as steel and agriculture.

These measures are part of an EU-wide Gas Demand Reduction Plan, ominously titled Save Gas for a Safe Winter, to reduce gas use in Europe by 15% until next spring. Among the proposals is a provision that officials in Brussels impose fines for non-compliance if they decide the crisis is escalating dangerously.

All of this comes amid growing fears that dwindling Russian gas supplies may plunge Europe into an energy crisis this winter. Overall, Russian gas exports to the EU are at about a third of last year’s levels, falling steadily since the invasion of Ukraine. While several European countries have been reducing their Russian gas imports, Russia itself has been reducing gas flows to Europe through Nord Stream 1, the continent’s biggest pipeline, citing mainly technical issues. Just the other day, citing equipment repair, Russia announced yet another reduction in the amount of natural gas flowing through Nord Stream 1, which is now operating at only 20% capacity.

This has caused natural gas spot prices to surge to levels not seen since early March; they are now almost 10 times higher than they were two years ago. In most countries, electricity prices have risen accordingly. Soaring energy prices are already fuelling record inflation — currently close to 9% and rising in the EU — squeezing people’s spending power, plunging thousands into poverty, and placing a huge burden on industry.

This is especially true for Germany, which is almost entirely dependent on Russian gas imports. Indeed, the country’s industrial production has been contracting for over three months. Astonishingly, 16% of industrial German companies have reduced production or partially stopped their activities due to rising energy prices. This helps explain why last month Germany became the first country to escalate its warning over gas supplies to the “alert level”.

The combined effect of rising prices, lagging demand (both internally and abroad, as China goes back into lockdown) and falling production and investment is already causing economic growth on the continent to grind to a halt. While institutions such as the European Commission and the IMF, despite significant downward revisions, still predict real GDP in the EU to be around 2.5% this year, several analysts consider even these far-from-rosy predictions to be overly optimistic. Carsten Brzeski, Chief Eurozone Economist at ING bank, for example, foresees a recession at the end of the year as high prices sap purchasing power.

To make matters worse, the ECB’s recent decision to raise interest rates will do little or nothing to curb inflation caused by supply-side factors, but will almost certainly further depress economic activity, making it harder for states to mobilise resources needed to cushion the effects of the energy crisis. And as for the ECB’s recently launched Transmission Protection Instrument (TPI), aimed at helping countries in financial distress, it may only be activated for those countries judged to be “fiscally sustainable” (a questionable concept in itself), even though the current polycrisis is inevitably bound to put a strain on the public finances of European countries.

Furthermore, even though the EU has sensibly — for once! — proposed to keep the EU’s fiscal rules suspended for another year, several countries, led by Germany, have announced their intention to embrace austerity once again. “For Germany, it’s clear: we will not make use of the general escape clause,” said the German Finance Minister Christian Lindner, arguing that the priority now had to be fighting inflation. “We will return to the debt brake. We have to stop the addiction to ever more indebtedness.” For this, he added, “we have to get out of our expansionary fiscal policies, and out of the debts, so that the central bank has the space to fight inflation with its means”.

In other words, Germany seems intent on once again plunging the continent even deeper into recession through utterly self-defeating austerity, just as it did in the wake of the financial crisis. Europe is already heading for a stagflationary scenario — a situation where high inflation is associated with low or negative growth. Austerity would simply make a bad situation even worse.

If things are bad now, however, it goes without saying that a further decrease in Russian gas flows, which still account for 40% of the EU’s gas imports — not to mention a full stop — would have utterly catastrophic consequences, especially if that were to happen during the winter, when demand for gas it at its highest. Energy, after all, is literally the lifeblood of the economy. It’s what keeps our houses lit and warm (or cool), and our cars, industries, supermarkets and electronic gadgets running. Without it, civilisation literally comes to a halt.

This is why if Europe’s energy supplies are unable to meet demand, the consequences would be almost unimaginable:

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