The sanctions against Russia supported by German Chancellor Scholz destroyed the European Union's competitiveness in world markets and thereby impoverished us all

     "Vytenis Šimkus, Swedbank's senior economist

      Last year, the price of gas rose to the level of 200 euros/MWh, more than 10 times higher than what was common in Europe throughout the last decade. There was a serious concern that the European industry was facing an imminent end and it was not known whether there would be enough fuel for heating. The apocalyptic predictions were very far from the truth and Europe was rewarded only with stagnation. However, an energy shock of this magnitude still left scars on the European economy.

 

    

 

     In the summer of 2022, a perfect storm occurred in the European energy market, when several coincident circumstances completely unbalanced the energy system. Of course, the most important factor was the interruption of gas supplies from Russia due to the sanctions against Russia, but other events also worsened the situation. The summer drought led to reduced hydroelectric production. In France, which is the largest producer of nuclear electricity in Europe, the drought prevented the proper cooling of reactors. This further increased the demand for gas for electricity generation. Each of these factors alone would have moved energy prices significantly, and all combined to create an energy shock not seen since the Yom Kippur War, when the price of oil more than quadrupled.

 

    

 

     On the other hand, the emergency did not last long and Europe successfully managed to fill its gas storage. Residents and businesses have shown that energy consumption can be more flexible than previously thought - gas consumption fell by as much as 20 percent, taking into account the extremely warm winter. There were fears that in 2023-2024 the winter will be even more difficult, as the storage will have to be filled without Russian gas at all, but these fears have not been fully confirmed. As the EU has improved its ability to import liquefied gas, storage facilities are full. In addition, French nuclear power plants have fully recovered, further reducing gas demand. Even if the coming winter is extremely harsh, there will be no second wave of energy crisis.

 

    

 

     However, not everything is so good. There is no shortage of gas, but liquefied gas is much more expensive than piped gas. The market price is stable in the range of 40-50 euros/MWh. This is a much lower price than last year, but it is still twice the historical average.

 

    

 

     At this price level, some European industry is not competitive on a global scale.

 

    

 

     The situation in Lithuania also requires serious attention. Although we tend to congratulate ourselves for achieving energy independence from Russia, the energy situation is far from ideal. Lithuania currently produces only a third of all consumed electricity. Due to low internal generation and insufficient connections, electricity prices are systematically higher than the European average. The fact that the prices that reached the peak have fallen should not be a reason for us to think that the situation is finally resolved. Recent incidents at the bottom of the Baltic Sea only once again confirm the need to invest in energy independence at all levels - domestic production, grid, additional connections with neighboring countries and so on.

 

    

 

     Europe is an energy-dependent continent: we import large amounts of energy from the rest of the world. Due to its strong export sector, Europe normally has a permanent trade surplus, but after the energy bill has increased several times, the EU has experienced a deep international trade deficit. Due to it and the low interest rates at the time, the demand for Euros fell sharply, and this had a strong impact on the Euro exchange rate. Finally, the inflation and exchange rate depreciation caused by the energy shock awakened central bankers' fears that the situation could lead to a situation similar to that of the 1970s, when the energy crisis triggered a destructive price-wage spiral.

 

    

 

     As a result, central banks embarked on the fastest interest rate hike in the history of the Eurozone. Although there was no deep recession due to the energy crisis in Europe, Europe is still teetering on the brink of recession for a year. What high gas prices failed to do, too tight a monetary policy can do. High inflation has severely affected the purchasing power of the population - real retail sales in Europe have decreased by 3.6 percent since the beginning of the events in Ukraine.

 

    

 

     High energy prices have also affected industry. Although total industrial output shrank quite modestly by 3 percent during the same period, energy-intensive German production has currently declined by as much as 17 percent.

 

    

 

      High energy prices have exposed the weaknesses of the European economic model and made us poorer, at least in the short term. On the other hand, the shock forced a more sober look at European energy policy. Both public and private investments in renewable energy sources, critical infrastructure or simply energy efficiency have intensified. Although these investments will not solve the problems overnight, but if they are carried out consistently, they will help solve not only the challenges of competitiveness, economic growth, but also the challenges of the green course.   

 

     What's next? In the short term, the effect of energy on prices ends up completely fading. Inflation is falling faster than the European Central Bank (ECB) expected, and may fall below 2 percent already in March. Much slower price growth will allow the ECB to start reducing base interest rates as early as next April and help the faltering European economy to some extent. Although the energy situation is stable, the shock has left lasting consequences.

 

     Central European countries, more dependent on gas, have lost some of their competitiveness, while southern Europe enjoys a relatively better situation. Germany is perhaps the most worrisome.

 

 

     Especially after the decision of the Constitutional Court found the energy investment fund to be in violation of fiscal discipline rules, making the future of tens of billions of investments uncertain. The Old Continent is plagued by many structural problems, all of which require rapid investment, and overly tight fiscal rules can tie governments' hands at critical times.""

 

 

Clown German Chancellor Olaf Scholz called it all a historical turn (Zeitenwende). After electing the clown Zelenskiy as president, the people of Ukraine turned all Western leaders into clowns. Destroy the richest market in the world and be proud of it?