Winter is coming to Europe

In the midst of an energy crisis, the gas issue has become one of the main topics of tension between Russia and Europe. On July 11, the Nord Stream 1 pipeline commenced a ten-day maintenance program, completely interrupting gas deliveries to Europe. Many commentators already see this as the end of Russian gas deliveries. If this is the case, it would be a disaster for the Old Continent. 

“Everyone should know that by and large we haven’t started anything yet in earnest. At the same time, we don’t reject peace talks. But those who reject them should know that the further it goes, the harder it will be for them to negotiate with us.” These are the words spoken by Vladimir Putin on July 7 at a meeting with parliamentary leaders.

The Russian president has remained ambiguous in his threats against the West, but everyone is guessing that gas is now at the heart of the economic war.

France’s Minister of Economy recently warned that Russia is likely to totally shut off its sale of natural gas to Europe. “Let’s get ready for a total shutdown of the Russian gas supply,” he said. “This is the most likely event”.

Nord Stream 1 is the main route for Russian gas to Germany, providing 55 billion cubic meters (bcm) per year. Since Russia reduced the capacity of Nord Stream 1, the European benchmark price of gas (Dutch TTF) has doubled to 170 EUR per megawatt hour, an increase of 145% since the beginning of the year.

Gas is already eight times more expensive in EU than in the US

Europe’s heart is under attack

Energy is vital to an economy, and Russian gas is crucial to Europe’s largest economy, Germany. It is used to heat the majority of households and to power the country’s industrial export machine.

In recent months, gas volumes from Russia have fallen to about 40% of their usual level. Moscow attributes this drop in throughput to the sanctions it faces, claiming that these have hampered its access to spare parts.

Economy Minister Habeck fears a social breakdown in the event of an energy shortage. “Companies would have to stop production, lay off their workers, supply chains would collapse, people would go into debt to pay their heating bills,” he said.

Germany is already suffering from rising energy prices. For the first time since 1991, the country recorded a negative trade balance of less than one billion EUR in May.

The economic research institute Prognos published a study in June explaining that, in the event of a complete shutdown of Russian gas, Germany’s gas reserves would run out after four weeks.

While households and social services would continue to be supplied with gas, the shutdown would particularly affect the steel, chemical and glass industries. Forecasts indicate a 50% drop in their production volume.

Europe’s leading economic power is crumbling

The Eurozone is in Crisis

The single currency recently fell to parity with the US$ for the first time in nearly 20 years.

The decline of the EUR against the US$ is mainly due to the restrictive monetary policy of the U.S. Federal Reserve, which combines interest rate increases and quantitative tightening. Rising energy prices and the collapse of German industry are adding to this dynamic.

The weakness of the EUR is driving up the price of imports, especially energy, at a time when policymakers are already struggling with record inflation.

The European Central Bank is in a very difficult position. If it does not raise interest rates, the EUR is likely to continue to plummet against the US$, which will continue to fuel a rise in inflation driven by higher energy prices. 

But if it raises interest rates, it risks causing a recession that will be very hard on southern Europe and could cause fragmentation within the Eurozone.

A country like Italy, with a debt of about 150% of its GDP, could quickly be strangled by the need to refinance its excessive debt burden. 

Recently, the spread between Italian and German 10-year bonds has widened. This indicates that investors are beginning to doubt the ability of the Italians to meet their payments relative to the Germans. It reached 2.52 percentage points on June 14. 

Europe will probably again face a systemic risk related to the sovereign debt of its member states.

Confidence in the Eurozone is eroding

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