Europe Macro – December 7, 2021

Leo Nelissen | December 7th, 2021

Austrian central bank Chief Holzman made interesting comments on what might be a reasonable policy change for the ECB.

When it comes to supply chains, we focus on demands to protect the European economy against mass layoffs caused by EV adoption and a dire situation regarding food production.

We also have an article on German plans to get rid of coal and what this means when looking at the bigger picture.

Last but not least, capital investments in the United Kingdom are rebounding.


1.1 ECB Governing Council member considers interest rate hike possible before end of bond purchases – Handelsblatt

Austrian central bank chief Robert Holzmann argues that the ECB should keep open the option of an interest rate hike before the end of its net bond purchases. “I was always against linking the bond-buying programme and the interest rate hike too closely,” he said in an interview with Handelsblatt.

In his view, “interest rates could already be raised while the net purchases are still underway.” In its monetary policy outlook (forward guidance), the ECB has so far stipulated that key interest rates should only rise shortly after the end of net bond purchases.

Holzmann is against this linkage, which dates back to a time when deflation, i.e. a spiral of falling prices, was more likely. In the case of higher inflation, on the other hand, “it could make sense in certain situations to raise interest rates already, but to continue to provide liquidity to the markets via the bond purchases.”

The ECB Governing Council member considers it “very unlikely” that inflation will “reach a level below two per cent in 2022 as a whole”. Regarding economic growth, he currently sees greater uncertainty because of the new Corona variant called Omikron. “In the next two to three weeks, we may know more about what it means from a medical perspective. But I remain optimistic that we will only see a dent in the economic recovery and not a broad slowdown.”

Comment: Holzmann is making a fair point. While the ECB is expected to start hiking once net purchases have been completely halted, he is making the point that inflation could be persistent. If the ECB hikes while maintaining its QE program, yields in countries like Italy can be kept low. Italy, among others, need cheap finance to fund growth projects as these programmes are currently driving the recovery. 

1.2 Omicron adds to doubts over ECB’s commitment to further stimulus – FT

European Central Bank policymakers are reassessing the extent of their commitment to extra stimulus, reflecting rising doubts about how quickly inflation is expected to fall as the Omicron coronavirus variant fuels worries of further price rises.

A trio of recent events has sown doubts in the minds of some rate-setters at the ECB, which has been forecasting for months that inflation would fall back below its target and justify the continuation of vast stimulus policies.

The first was the surge in eurozone inflation to 4.9 per cent in November, well above the ECB’s 2 per cent target and a record since the euro was created two decades ago. This was followed by the emergence of a new coronavirus variant, which threatens to prolong the pandemic and with it the supply chain bottlenecks that have pushed up prices.

[…] The ECB has bought more than €2.1tn of bonds over the past two years, soaking up more than the total net issuance of eurozone governments in an effort to keep borrowing costs low.

But analysts at UniCredit calculated that this could change next year, even though eurozone governments are expected to raise less debt, unless the central bank doubles the amount of bonds it buys under an earlier asset purchase programme to €40bn a month from April until the end of 2022.

[…] By continuing large-scale bond-buying next year, the ECB would be a significant outlier compared with other central banks that planned to halt asset purchases soon, including the Fed and Bank of England. The Bank of Canada has already done so.

Consensus is growing on the ECB council that there is little extra benefit from increasing the monthly flow of asset purchases in terms of boosting inflation, according to two of its members. “There is no point expanding the asset purchase programme after March,” said one.

Analysts think the ECB could commit to an extra “envelope” of bond purchases after March next year. But they said its decision was complicated by the fact that it was almost certain to raise its 2022 inflation forecast to well above 2 per cent next week, making it harder to justify a commitment to keep buying large amounts of bonds.

1.3 Christine Lagarde orders redesign of euro banknotes to make them ‘more relatable’ – The Telegraph

Euro banknotes are to undergo a major redesign, as the bloc’s central bank strives to make the currency “more relatable to Europeans of all ages and backgrounds”.

Christine Lagarde, president of the European Central Bank (ECB), has commissioned 19 experts in fields from art and design to physics and archaeology – one from each country in the currency area – to select new banknote designs by 2024.

Current notes have a theme of windows, doorways and bridges, which the ECB said are based on “ages and styles”.

New themes will be devised by the advisory panel. The ECB will then put these to the public, followed by a competition for new banknotes, a further consultation and then a final decision will be made by the Governing Council of the ECB, the body that is best known for making decisions on interest rates and quantitative easing.

Ms Lagarde stressed that notes are not going to be scrapped amid concerns that the ECB’s decision to investigate the possibility of a new digital euro could sound the death knell for physical money.

She said: “Euro banknotes are here to stay. They are a tangible and visible symbol that we stand together in Europe, particularly in times of crisis, and there is still a strong demand for them.

Comment: The only thing that’s worse than the ECB being behind the curve is Lagarde’s attempt to change something nobody in the Euro Area cares about – absolutely nobody.

The only takeaway here is that there seem to be no plans to ban euro notes. At least not yet. Because apparently, they are the glue that keeps Europeans together in times of crisis. Who at the ECB makes stuff like this up?

1.4 Bank should fire a warning shot to stop runaway wage rises – The Times

[…] What matters is not the level of demand by itself but how that relates to supply, which includes the supply of imports as well as of UK-produced goods and services. Supply has dropped because of Covid, not just here, but globally. Millions of people around the world have dropped out of the labour force. Some have retired early while others may not be looking for work to reduce the risk of getting sick, could be looking after family or simply taking a break. Meanwhile, lockdowns and other restrictions have slowed goods production — microchips for cars being a prominent example — and snarled up port operations, such as in China. Covid is therefore restricting the supply of goods.

Reduced goods supply could not have come at a worse time, because consumers are wanting to buy more “stuff” and fewer services: gaming consoles and flat-screen TVs rather than eating out or going to the cinema. With higher demand but lower supply, goods prices are rising significantly, reinforced by higher transport and energy costs. Since prices are more flexible upward than downward, the shift to a very uneven distribution of demand relative to supply raises inflation by creating hotspots. Prices in the hotspots go up much more than before but firms do not cut prices in areas of damp demand, especially if they are experiencing higher costs.

[…] The Bank of England is crossing its fingers and hoping that workers will take the price rises on the chin and not receive higher pay rises. That looks like wishful thinking. Firms facing high demand and worker shortages have an incentive to meet higher pay demands, especially if they expect to be able to raise prices. The inflation expectations of firms, households and markets have risen, not just in the next year but longer term. A shot across the bows by the Bank of England would be a sensible step to steady inflation expectations in the months ahead because inflation is yet to peak, at 5 per cent or above, in April. Without Bank action we risk inflation expectations soaring if there is a further inflationary shock, which would take us into a sustained period of significant inflation.


2.1 Will inflation ketchup? – FT

Hans-Werner Sinn, the forever Ordoliberal former head of influential Munich-based think-tank Ifo, has made a career out of warning about inflation. So, with prices rising at north of 5 per cent here in Germany, it’s not surprising that he’s back on our screens.

Fans will be pleased to know that he’s lost neither the beard, nor the belligerence.

Here he is on TV. Berlin last week vigorously shaking a bottle of Heinz’s finest to prove he was right all along that monetary policymakers’ low rates and bond buying “binges” were going to trigger spiralling inflation. (The bottle clip is around the 14 minute mark for those of you who can’t quite stomach the full 50 minutes.)

What he’s getting at is clear enough. Policymakers have been shaking the bottle so hard that soaring prices are now being unleashed like big red blobs, creating havoc on the white plate of calm that characterised our lives in those bygone days when the European Central Bank was merely a glint in a French bureaucrat’s eye. The end result is, as the German commentator — borrowing from one of Sinn’s tracts — puts it, “Erst kommt gar nichts, und dann kommt ganz viel.”

[…] Back in 2010, The Economist’s Buttonwood column delivered its take on the ketchup theory of inflation, quoting Tim Lee of pi Economics, who described it thus: “The central bank keeps ‘shaking the bottle’ (ie monetising debt) but no ketchup (ie inflation) comes out — so it shakes even harder.”

More recently, the FT’s Martin Sandbu did what all right-thinking people do and turned the bottle on its head and waited, using the theory to explain why he thinks that the ketchupy nature of price pressures right now might actually lead to deflation once supply chain snags disappear.

To be fair to Sinn, inflation’s clearly not a nothingburger. At the very least the theory underlines the, erm, pickle policymakers face in gauging just how pent up price pressures are.

Comment: Next year will show if the ketchup theory is pertinent, as the ECB is convinced that inflation will be a nothing burger due to sub-2% inflation. That’s a tricky bet given ongoing supply chain issues and an energy market that won’t see a significant rebound in supply anytime soon.

2.2 Inflation to rise above 5%, says Bank deputy governor Ben Broadbent – The Times

The Bank of England’s deputy governor warned that companies could struggle to hire workers as he predicted that inflation could “comfortably exceed” 5 per cent in the spring.

Ben Broadbent said that an anticipated jump in energy bills for millions of consumers would increase the cost of living even as other inflationary pressures moderate. In a speech to Leeds University Business School he said households on standard variable rate gas and electricity deals would have to pay more because of the surge in wholesale prices.

“The aggregate rate of inflation is likely to rise further over the next few months and the chances are that it will comfortably exceed 5 per cent when the Ofgem [regulator] cap on retail energy prices is next adjusted, in April,” Broadbent said.

The deputy governor said that a number of “specific factors” were to blame for the predicted rise in the standard variable rate, which will be reset in April. These ranged from a prolonged period of cold weather last winter that drained gas inventories in Europe, to interruptions to the green energy production, to supply problems in Norway and Russia.

Despite the pressure on energy bills, Broadbent struck a dovish tone on other sources of inflation, such as the rise in the cost of imported goods.

[…] Broadbent said that the recent jump in inflation for goods, which has been driven by bottlenecks in global supply chains, was likely to fade and in some cases reverse long before a rate rise could reduce demand. “I still think it’s more likely than not — looking a couple of years ahead as we should — that these pressures on traded goods prices are more likely to subside than intensify,” he said.

He said that the pressures in the labour market should ease but cautioned that employers could not count on a ready supply of suitable workers. “The sheer speed of the recovery has thrown some sand in the wheels of the labour market,” said Broadbent, who added that the the rise in vacancies has been “so rapid” that there had been “friction in the process of filling them”.

“Once those wheels start to turn, and jobs get allocated, one would expect some of this pressure to abate,” he said, and cautioned that “it remains to be seen” whether this would be the case.

Comment: The big question is if supply chain bottlenecks can ease next year. That’s the main thing central banks will and should focus on if (not when) countries are able to stop the surge in energy prices, which is caused by the unwillingness to support supply. Additionally, if COVID measures around the world focus on lockdowns, we will continue to see above-average inflation in 2022 and likely even beyond.


3.1 E-fuels instead of mass layoffs: Suppliers propose changes to Green Deal – Handelsblatt

In Brussels, there is often talk of a ” fair” change in the economy. But the way the EU’s climate protection program is currently designed, many Europeans will suffer, fears Clepa, the association of European automotive suppliers. In a study, it has calculated how the conversion of car production to electric drives would affect the labor market.

The result: the number of employees will only grow until 2025, but then fall dramatically until 2035, when only electric cars may be registered. Of the 645,000 jobs currently in the industry, 501,000 would be eliminated. At the same time, 226,000 new jobs would be created. But these would not necessarily be in the same company, often not even in the same country.

The authors of the study expect a large number of jobs to be cut, particularly in Eastern Europe, but also in Germany. In Germany alone, the figure would be 83,000, and Italy would also be badly affected. In France, on the other hand, a particularly large number of battery factories could be built due to low energy prices, which would more than compensate for the negative effect there.

Suppliers are calling for climate protection to be designed in a technology-neutral way. Strictly speaking, the laws proposed by the EU Commission meet this requirement. But in their effect, they will hardly allow a market for internal combustion engines.

For example, through its Green Deal, the Commission wants to mandate that cars emit no carbon dioxide (CO2) from 2035. Suppliers are calling for two changes to the law:

First, CO2 emissions during car production should be included in the carbon footprint. This would be an advantage for combustion engines, whose production generates significantly less CO2.

Secondly, car manufacturers would be allowed to buy e-fuels and add them to gasoline at filling stations. The CO2 saved as a result would be credited to their cars. The cars would then continue to emit CO2, but it would be saved elsewhere.

The new German government is also open to e-fuels, but not to blending them into normal gasoline. According to the coalition agreement, it wants to “ensure that only vehicles that can be refueled with e-fuels can be newly registered. How this is to be technically possible remains open.

Many climate protectionists reject e-fuels in car engines because the energy transition is creating a huge demand for climate-neutral fuels anyway. There are no alternatives for ships, aircraft and the chemical industry. Supplying them alone will require immense investments.

In addition, energy is lost in the production of the fuels. A car powered by e-fuels therefore consumes more electricity than a car powered directly by electricity.

The jobs argument counters this. Clepa Secretary General Sigrid de Vries said, “It is crucial that we focus on jobs at automotive suppliers in managing the social and economic impact of change.”

Comment: Yesterday, we covered a Financial Times article that highlighted the massive impact an accelerating EV adoption would have on the European workforce. That’s mainly because EV engines use less moving parts. This article could not have been better timed, as it shows that suppliers are slowly freaking out. They know better than anyone else what this transition means for the automotive industry and employment. Hence, they make very reasonable requests to change how “sustainability” is measured as the production of clean diesel cars beats any EV production. They also make the call for e-fuels that would allow the continuation of internal combustion engines.

The problem is that all of these ideas are worthless without infrastructure that supports e-fuel production (includes reliable and affordable energy) and the support from governments. It would be great for all parties involved if this problem could be solved before the European economy gets hit by a shockwave of layoffs over the next 10-20 years.

3.2 Russia stops fertiliser exports – Agrarheute

Russian authorities stopped fertiliser exports at some ports last week. The reason: the exporters lacked the necessary licences. The Russian government had already announced in November that it would regulate exports of the most important nitrogen fertilisers through quotas. The reason given was to curb the strong inflation on the domestic market and to get a grip on the cost explosion for farmers.

At the beginning of December, several exports were suspended due to the alleged lack of export licences, the Russian news agency Interfax and Reuters reported. The available supply is thus becoming ever tighter, as other major fertiliser exporters such as China are also regulating or suspending their fertiliser exports.

The Russian government had previously decided to restrict exports of various nitrogen fertilisers for an initial period of six months. The quotas were to be in place for 1 December to 31 May and distributed to exporters by the end of November.

“However, those who had not registered their cargo by 1 December could not export fertilisers,” Interfax reported. The ships are stuck near the major export ports as they are not allowed to load fertiliser, although cargo is piling up in the ports,” it added. The export licences were supposed to be distributed by 6 December.

[…] According to information from AgraEuropa, a number of MEPs demanded last week that the EU Commission do something about the high prices. In the Agriculture Committee, they proposed various measures to combat the high fertiliser prices.

Dutch MEPs, for example, believe that the marketing of organic material is a solution. Products made from manure are technically mature, selling them would be profitable, said Dutch MEP Jan Huitema.

French MEPs drew attention to the plight of farmers as a result of high input prices. They therefore advocated for emergency aid from the EU budget.

Comment: Another development in the wrong direction. Russia is protecting its farmers by halting exports. Using nitrogen fertilizer as an example, Russia is the fourth-largest producer with an annual volume of 10.4 million metric tons. An export implosion will make fertilizer products in Europe more expensive – especially because production is already expensive due to high natural gas prices. Farmers will cut down on fertilizer use as alternatives like slurry are unable to close the gap. EU funding might help a bit, but overall, we’re at a point where next year’s crop yields will likely be significantly lower – hence, further causing food inflation.


4.1 No coal phase-out without gas-fired power plants? – Tagesschau

The energy plans of the traffic light coalition are putting Germany’s utilities under pressure. Experts and representatives of the energy industry warn that an electricity shortfall could loom if the phase-out of coal were to come as early as 2030. This is the “ideal” goal of the coalition agreement between the SPD, the Greens and the FDP. The massive expansion of renewable energies will not be enough after that – especially not on days when there is little wind and no sun.

“If coal and nuclear energy are completely taken off the grid, there will be a gigantic gap that has to be filled,” says e.on CEO Leonhard Birnbaum. This is only possible with a source that supplies reliably: Gas. Birnbaum sees no alternative to gas-fired power plants in the short term. The industry also sees gas-fired power plants as an indispensable transitional technology for the energy transition. New gas-fired power plants are necessary to ensure security of supply, the Federation of German Industries (BDI) has repeatedly emphasised in recent months. Accordingly, the future government is focusing on the construction of new gas-fired power plants in addition to renewable energies such as solar and wind. The only condition is that they must be “H2-ready”, i.e. they must be able to be converted to run on green hydrogen at a later date. “Without new gas-fired power plants as a bridging technology, we run the risk of a blackout despite all our efforts to expand renewables,” warns Andreas Pinkwart (FDP), Minister of Economics of North Rhine-Westphalia.

The Energy Economics Institute (EWI) at the University of Cologne has now determined how high the demand is. According to EWI expert Max Gierkink, new capacities of 23 gigawatts must be created by 2030. In purely mathematical terms, this would correspond to the output of 23 nuclear power plants. The BDI sees an even greater need. President Siegfried Russwurm believes that 43 gigawatts of gas-fired power plants need to be added by 2030.

[…] The head of Siemens Energy, Christian Bruch, believes the ball is now in the politicians’ court. “Now it is important to implement the plans quickly and create the conditions for private investment in the conversion,” he demands. EWI researcher Gierkrink is in favour of government incentives for the massive expansion of gas-fired power plants. “The market conditions do not currently permit the addition of 23 GW.

Comment: Germany’s energy security is at stake. Even state-owned Tagesschau is now sharing the findings we briefly discussed yesterday. On top of these issues, there is one huge bottleneck, and that’s Nord Stream 2. If the situation in East Europe were to escalate, sanctions would almost certainly be applied where it hurts most, and that’s Nord Stream 2.

If natural gas is supposed to fill the gap left by a phase out of coal and nuclear, Germany needs to find reliable sources that do not pose a threat to the EUs security – like Nord Stream 2.

Norbert Röttgen, a candidate for CDU leadership, said that a Russian invasion would halt Nord Stream 2 entirely. Even though Germany’s new leader Scholz’ party SPD is deep in Russia’s pockets, they won’t be able to stop it.

These are also issues that the Greens will face who hold the economy and foreign ministries. They have already compromised large parts of their agenda and will need to make sure that Germany has access to natural gas – even if this will eventually be turned into a way to generate green hydrogen.

4.2 Europe’s Thirst for Electricity Spurs Nordic Grid Blockade – Bloomberg

A spat over electricity supplies is heating up in northern Europe.

Sweden is blocking Norway from using its grids to transfer power from producers throughout the region. That’s angered Norway, which in turn has cut flows to its Nordic neighbor.

The dispute has built up around the use of cross-border power cables, which are a key part of Europe’s plans to decarbonize since they give adjacent countries access to low-carbon resources such as wind or hydropower. The electricity flows to wherever prices are higher — without interference from grid operators — but in the event of a supply squeeze, flows can be stopped.

Sweden moved to safeguard the security of its grid after Norway started increasing electricity

exports through huge new cables to Germany and the U.K. Those exports at times have drawn

energy away from Sweden, resulting in the country’s system operator cutting capacity at its

Nordic borders, preventing exports but also hindering imports, which it relies on to handle

demand spikes during winter.

Norway hit back last week by cutting flows to Sweden, this will prioritize better paying customers

in Europe giving them access to its vast hydro resources at the expense of its Nordic neighbors.

4.3 The Biggest Myth About Nuclear ‘Waste’ – RealClear Science

With a dismissive wave of the hand, nuclear power opponents play their trump card to argue why they will never support this safe, dependable, carbon-free source of energy.

“Radioactive waste.”

But in doing so, they reveal their ignorance. Nuclear ‘waste’ – in the form of spent uranium fuel rods – is not really waste.

The United States, which generates about a fifth of its electricity from nuclear power, produces roughly 2,000 metric tons of spent nuclear fuel each year, which must be securely stored in immense concrete and steel casks for hundreds of years. That sounds like a taxing task, but if you aggregate all of the spent fuel produced in the U.S. since the 1950s, it would actually fit on one football field stacked about ten yards high. Nuclear plant operators are more than capable of handling this amount for the foreseeable future.

However, if politicians got out of the way and auspicious trends in nuclear engineering continue to advance, this ‘waste’ could easily become nuclear fuel again. Current reactors used in the U.S. can only extract about 3-5% of the available energy in nuclear fuel before it is considered ‘spent’. Other countries like France and Russia reprocess their waste to unlock more of that unused energy, but in the U.S., policymakers refuse this option out of fear that any plutonium produced as a byproduct could fall into unfriendly hands and be used in weapons. Luckily, with novel nuclear reactors on the horizon, we may yet be able to utilize our stored spent nuclear fuel.

Reactor designs that might debut in the 2030s, which operate at higher temperatures and use salt-based coolants, could actually produce energy using the nuclear ‘waste’ sitting in storage. TerraPower, the Bill Gates-backed nuclear startup, estimates that its traveling-wave reactor design could electrify America for hundreds of years using only the current supply of spent nuclear fuel. A more modest estimate suggests that available spent nuclear fuel used in novel high-temperature reactors could provide 50% of the United States’ power needs for 200 years.

According to the World Nuclear Association, “Since the dawn of the civil nuclear power industry, nuclear waste has never caused harm to people.” Though reality tells us that properly-handled nuclear ‘waste’ is innocuous and not really waste at all, the misconception persists. Disabusing ourselves of this myth could yield outsized benefits for society.

Comment: Nuclear energy waste was not a problem, to begin with. However, it is one of two reasons why “environmentalists” are against it – the other is Chernobyl. The good news is that even this waste can soon be turned into energy. There is no good reason why countries shouldn’t push for affordable and reliable energy from nuclear. Especially in this energy crisis. Initial capital expenditures are high, but isn’t that a price worth paying?

4.4 Add US crude oil to the mix, demands BP – The Times

It’s as British as roast beef and Yorkshire pud — or at any rate British/Norwegian. The definition of Brent crude has consisted entirely of black stuff from the North Sea since the first barrels were piped out of the Brent field in 1976.

But now there is pressure for the formula to include some American crude for the first time and yesterday it emerged that one of Britain’s biggest companies, BP, supported a dilution.

BP “strongly believes that the inclusion of West Texas Intermediate Midland, executed correctly, is the best solution for enhancing liquidity” in the international oil markets, a document quoted by Reuters yesterday said.

Brent is the benchmark used to price more than half the world’s physical crude oil as well as the financial derivatives that enable traders to bet on changes to energy costs. It is based on crude coming from the Brent field and four other fields in the North Sea — Forties, Oseberg, Ekofisk and Troll.

Yet dwindling supplies from the North Sea made it increasingly difficult to rely on the benchmark, as constituted at present, as a reliable indicator of the price of light, sweet crude oil — the type of preferred by refiners, critics say.

West Texas Intermediate is the benchmark used in much of North America. WTI Midland refers to the gathering point in West Texas where pipelines from fields in the American interior converge. It too is light (less dense) and sweet (low in sulphur) — like North Sea oil.

S&P Global Platts, the energy prices agency, said in February that it planned to include WTI in the formula for Brent, but a month later deferred the move because of resistance from some in the industry. It has since held talks with the Intercontinental Exchange, the home of Brent futures trading, to find an accommodation.

Platts said: “We respect the right of all participants to express their views publicly, as was the case with BP today.”

4.5 Carbon price surge triggers UK ‘cost containment’ market mechanism – FT

A sustained rally that has brought the price of carbon allowances to new highs has triggered a market mechanism that could see the UK government intervening to bring down prices.

The global energy crunch and renewed focus on emissions after the UN climate summit in Glasgow has fuelled a surge in the price of allowances issued under the both the EU and UK emissions trading systems.

Under the systems, governments set a cap on the maximum level of emissions and create permits, or allowances, for each unit of emissions issued under the cap. Companies that are heavy polluters are obliged to buy credits granting them permission to emit one tonne of carbon.

A gas shortage has led some energy producers, which are regulated under the systems, to switch over to cheaper but dirtier coal. Since coal is more carbon intensive than gas, demand for allowances has increased.

[…] Action to push down prices could include increasing the number of credits due to be sold in upcoming auctions, which occur every two weeks, by bringing forward allowances from future years.

Sørhus said it would be important for the government to explain “the basis for its decision”.

There were “good fundamental reasons for prices to be where they currently are,” said Sebastian Rilling, EU power and carbon markets analyst at ICIS, the market intelligence group. In addition to the effects of the gas crisis, there was relatively little supply in the new UK market, but substantial demand, he said.

Increasing the short-term supply of allowances is likely to reduce supply in the long term, since a finite number of credits are auctioned each year and the number sold annually is designed to fall over time to incentivise companies to reduce their emissions.

Comment: The EU frequently shoots itself in the foot and calls it progress. In today’s episode of “why on earth are we making life so complicated” we see that carbon credit prices are going through the roof (see graph below). While almost everyone wants a future with less pollution, it does make no sense to make things more complicated through carbon credits. We need to increase economic output to close the COVID output gap and provide our economies with affordable energy – right now, that’s still based on fossil fuels. This trend is not sustainable and will make it harder to re-shore production from overseas as a result of post-COVID supply chain simplification. It will also make it close to impossible to achieve low inflation rates in the mid-term. Something needs to be done quickly. Abandoning this system won’t happen, so our best hope is that governments auction more credits.

4.6 Poland in talks with Qatar to import more gas outside of Russia – Biznes Alert

The dependence of the European Union on gas supply from Russia is growing. According to Eurostat, Russians accounted for 43.9 percent of the gas supplied to the continent in 2020 and 46.8 percent in the first half of 2021. In 2011, it was still 30 percent. The dependence will increase if the next gas supply project from Russia, i.e. Nord Stream 2 is launched, which may be used to replace the Ukrainian route, and, e.g. to secure a new invasion on Ukraine. That is why fluctuations in the supply of Russian gas are important for the price of this fuel, and have contributed to the aggravation of the energy crisis. Gazprom was the only company that did not accumulate stocks in European storage under its control in the summer, as we had already written on

Poland maximizes gas supply from outside Russia. It has an LNG terminal in Świnoujście with an annual capacity of 8.3 bcm, and is planning to build a third tank, which will expand the volume to 10 bcm a year. Apart from that, Poland is also building the Baltic Pipe gas pipeline with a capacity of 10 bcm a year, that is to be finished by the end of 2022. It’s also planning an FSRU in the Gulf of Gdańsk with a capacity of 4-8.5 billion cubic meters annually in 2026. PGNiG imports 0.52 million tons of LNG per year (0.7 billion cubic metres after regasification) in 2019-2022 from the American Cheniere Marketing International LLP. This volume will increase to 1.45 million tons of LNG (1.95 billion cubic meters after regasification) annually between 2023 and 2042. As of 2023, PGNiG will import 1.5 million tons from Venture Global Calcasieu Pass and 4 million tons per year from Venture Global Plaquemines, bringing the total to 5.5 million tons, or 7.4 billion cubic metres after regasification annually. Poles will therefore have at their disposal 9.35 billion cubic meters of liquefied gas after regasification from the USA. Only the contract with Cheniere contains a delivery ex ship clause transferring the responsibility for the cargo to the supplier, aimed primarily at the Polish market. The others include a free on board clause allowing the recipient to ship the cargo anywhere in the world, but after taking responsibility for any price fluctuations. These cargoes can go where there is a better price, which is often to Asia, but in the face of the energy crisis and high prices in Europe, also to our continent.

Comment: Poland is increasingly looking for liquid gas from Qatar. This makes sense as diversification is not only key to reduce Russia’s leverage, but also to maintain reliable energy in Poland. For example, yesterday, Poland’s electricity transmission operator issued an emergency appeal for mutual support to neighbouring grids because of low wind generation, forced outages, and scheduled maintenance.

The grid relied heavily on imports from Germany and to a lesser extent Sweden and Ukraine. These power load changes are dangerous as they can lead to electricity outages in all of Europe. And it is yet again a warning that wind energy is not reliable.


5.1 Non-bank financial sector: systemic regulation needed – BIS

Non-bank financial intermediaries (NBFIs) have massively increased their footprint since the Great Financial Crisis (GFC). In part, this represents a long-term structural trend; it has also been a response to retrenchment by banks.

NBFIs offer a broad range of investment and funding opportunities; as such, they are a healthy source of diversity in external financing. They cover areas that banks do not, they enhance innovation and economic growth, and they can help make the financial system more resilient to credit risk.

Given their heft, NBFIs have attracted increasing policy attention. While their activities have obvious implications for investor protection, their impact is more far-reaching. When things go wrong, NBFIs can trigger or amplify market stress. And they affect how monetary policy is transmitted to the economy, how it is implemented on a day-to-day basis, and even how it is calibrated and communicated. Recent ructions in government bond markets, covered by this Quarterly Review, are the latest illustration of how NBFIs can have a material effect even on the US government yield curve – a primary focus of policy and the benchmark for asset pricing worldwide.

Crucially, NBFIs have risen to prominence in policy discussions because they can be, and have been, a source of financial instability. In March 2020 and in previous episodes of similar market turmoil, the NBFI sector amplified stress through inherent structural vulnerabilities, notably liquidity mismatches and hidden leverage. With system-wide stability under threat, massive central bank support was necessary to restore the calm. Such repeated occurrences suggest that the status quo is unacceptable. Fundamental adjustments to the regulatory framework for NBFIs are called for, to make it fully fit for purpose.

This issue of the BIS Quarterly Review delves into selected aspects of the NBFI ecosystem, with the aim of shedding light on the challenges involved. Its special features focus on factors that could undermine financial stability, including in fast-growing areas such as sustainable finance and the crypto universe. The purpose is to inform policy discussions on how to design NBFI regulation from a system-wide perspective.

Comment: In its quarterly review, the Bank for International Settlements focuses on non-bank financial intermediaries. Also known as shadow banks. Based on liquidity, the BIS makes the case that more regulation is needed as shadow banks gain importance in global finance.

The bigger picture is important. In the EU, banks dominate financing. On top of that, certain SMEs have difficulties getting access to financing, which causes low productivity in countries like Italy. There is also a case to be made that alternative financing causes less systematic risk.

Needless to say, there are issues. March 2020 showed that there were systematic problems when it comes to how these intermediaries operate.

The bottom line, however, is that policy makers need to look at the benefits.


6.1 Brussels attack on gig economy sends shares in Deliveroo and Just Eat tumbling – The Telegraph

Brussels is preparing to force “gig economy” companies such as Deliveroo to give workers extra rights regardless of how their contracts are worded in a blow for one of Europe’s fastest-growing industries.

The European Commission is expected to lay out draft rules on Wednesday that would presume millions of workers are employed no matter what their contracts say, according to sources.

Concern over the proposals sparked a sharp fall in shares at companies which have thrived on the gig economy model, where self-employed workers are paid per trip to drive cabs or deliver groceries and takeaways.

Deliveroo shares fell as much as 7pc before recovering some ground. Shares in its German rival Delivery Hero fell 6pc, as did Just Eat Takeaway.

[…] The Commission’s proposals are expected to be published later this week but could take years to come into force.

Opponents claim that the gig economy model denies guaranteed wages, holiday pay and other rights to workers who are in reality expected to behave like employees.

Food delivery companies have been hit by disputes over their practices across Europe, with Spain banning gig economy work in the industry and forcing companies to take on riders as staff. Deliveroo pulled out of Spain last year, citing competition in the market.

In Italy, food delivery companies were handed fines worth €733m (£625m) over their labour practices, although prosecutors reached a deal with Uber Eats, Just Eat, Deliveroo and Glovo for improved conditions in exchange for a reduced penalty.


7.1 Britain leads way in tech investment – The Times

Britain is leading the way in an investment boom in Europe’s technology industry, with more than $100 billion of venture capital deployed this year, three times the level of that in 2020, according to a report.

The total number of technology companies that have reached “unicorn” status in Europe — a valuation of $1 billion or more — has grown from 223 last year to 321, according to a new report from Atomico, the venture capital firm.

The UK topped metrics including total capital invested and number of unicorns created. London-based businesses secured the most capital, while Cambridge was chosen as the “unicorn capital of Europe” in terms of the number of these businesses created per inhabitant, thanks to its “high concentration of talent”. Examples include CMR Surgical, a medical robotics company.

[…] Tom Wehmeier, partner at Atomico, and co-author of the report, said the “scale and pace of growth” had changed. “The total value of the European tech ecosystem is now in excess of $3 trillion. European tech went on this decades-long journey to get to that first trillion in December 2018. The second trillion happened in 24 months.” Atomico said a further $1 trillion was added in eight months this year.

[…] Sarah Guemouri, senior associate at Atomico, and co-author of the report, added: “Even in a conservative scenario, we expect European tech to at least double in the coming decade and add trillions of dollars worth of value.”

7.2 UK business investment expected to rebound strongly in 2022 – FT

UK business investment is expected to rebound strongly in 2022 because of a generous government tax incentive and the need to upgrade assets that have been neglected as a result of uncertainties related to Brexit and the pandemic.

Most economists expect capital expenditure to grow at its fastest pace in years in 2022, helping — along with rising consumer consumption — to drive economic growth. But many predict that the two-year incentive that expires in March 2023, known as the super-deduction, will only bring forward some investment and not help create much new spending.

As a result, they forecast that the policy might be insufficient to make up for the lost ground.

Business investment would be a “major growth driver” in 2022, said Thomas Pugh, an economist at tax consultancy RSM UK. With companies holding £140bn more cash than before the pandemic and a large backlog of projects likely to have accumulated during the lockdowns, they are “in a good position to invest”, he said.

The Omicron coronavirus variant might threaten the expected rebound, even if new restrictions are not imposed, because of heightened uncertainty.

But if Omicron does not disrupt production and consumption patterns, many economists expect companies to take advantage of the super-deduction to invest.

The measure allows businesses to cut their tax bills by 25p for every £1 they invest in plant and machinery. Steffan Ball, chief UK economist at Goldman Sachs, said this was one of the most generous government investment incentives globally and that it was well-timed because physical assets had aged following years of under-investment.

[…] Chief financial officers from UK businesses surveyed monthly by the Bank of England expect Covid-19 to dampen business investment by 8 per cent in the final quarter of this year, but this drag is expected to reverse from the second quarter of next year.

Companies’ needs and government policies, which also include investment in infrastructure and skills, “should end up being very positive for productivity and business investment”, said Ball. This would be crucial if the government was going to deliver on prime minister Boris Johnson’s pledge to create a “high-wage, high-skill, high-productivity economy”.

[…] In the UK, business investment in the third quarter was still about 10 per cent below the level in the second quarter of 2016, when the country voted to leave the EU. Over the same period, it grew by 8 per cent in the eurozone and by nearly 20 per cent in the US.

[…] Yet, the longer-term outlook for business investment remains uncertain. Brexit worries have not disappeared and many economists said the growth expected over the next year would not persist.

7.3 UK house prices rise at the fastest pace in 15 years – FT

UK house prices registered their strongest three-month growth in 15 years in November, boosted by demand for a limited supply of housing stock, low mortgage rates and a strong labour market.

The average price of a UK property hit a record high of £273,000 last month, according to the mortgage provider Halifax. The value of homes rose 1 per cent from October, 8.2 per cent higher than in the same period last year.

“The performance of the market continues to be underpinned by a shortage of available properties, a strong labour market and keen competition among mortgage providers keeping rates close to historic lows,” said Russell Galley, managing director at Halifax.

In the three months to November, house prices registered a 3.4 per cent increase compared with the previous quarter, the fastest pace since 2006.


8.1 German housing market sets alarm bells ringing in Europe’s biggest economy – The Telegraph

[…] House prices grew 11pc, year on year, in the third quarter and have been increasing strongly in the last decade. It matches the rocketing growth seen in Britain where worries of further price increases were stoked yesterday by The Daily Telegraph revealing that the Bank of England is set to loosen mortgage affordability rules.

The house price boom in Germany has set off alarm bells at the ECB and prompted fears of a property bubble that would have dire consequences for Europe’s biggest economy.

Last month the ECB put Germany’s property market in its danger zone as it warned the risk of a eurozone house price plunge has “increased substantially”. The Netherlands and Austria were also deemed vulnerable to a potential bubble popping with economists warning of spillover effects to the rest of the economy.

“Household indebtedness and residential real estate overvaluation are increasing, adding to the build-up of medium-term vulnerabilities and concerns over a debt-fuelled housing bubble,” ECB policymakers said in its financial stability report.

A sharp rise in interest rates threatens to be the spark, causing a sudden slump as inflation takes off. Germany avoided the housing bubbles of the financial crisis but has seen rapid price growth in recent years. Experts say the boom has been fuelled by low interest rates, a jump in population partly caused by migrants, and speculative behaviour as prices rise.

“Whenever you see that prices are going somewhere then the speculative capital goes into that market in order to take advantage of the expected price increases,” says Konstantin Kholodilin, economist at think tank DIW Berlin.

[…] Prices could stagnate, allowing incomes and affordability to catch up. More worrying would be if prices continued to grow rapidly, fuelled by the shortfall in supply, but most dangerous would be if they suffered a sharp decline as a bubble bursts.

Comment: There are a few things to unpack. First, Germany’s housing market is hitting a wall. Cities like Frankfurt and Munich are being pressured by affordability. Rents have reached a level that make it simply impossible for people to move into expensive cities. On top of that, expanding supply isn’t easy due to regulations and currently, supply chain issues.

Second, the ECB is trapped for many reasons. One of them is the fact that cheap funding is needed to maintain growth in countries like Italy who would be unable to achieve their budget plans without low rates. The ECB also knows that interest rate hikes to combat inflation will pressure the euro area housing market as more cheap funding is needed to maintain current price levels.

8.2 German industrial production sends signs of life – ING Think

Industrial production finally sent some signs of life, increasing by 2.8% month-on-month in October, from -0.5% MoM in September. It was only the third monthly increase this year. On the year, industrial production was still down by 0.6%, from -0.4% in September. The increase in industrial production was driven by all sectors. Despite the long-awaited relief, this strong industrial production data does not yet mark a turning point.

Comment: Today’s strong industrial data is finally a glimmer of hope but does not come as a surprise. Industrial production had been so weak that any single container coming to Germany and every handful of microchips would immediately lead to a pick-up in production. However, supply chain frictions have not been resolved, implying that the October industrial data is rather a short-lived rebound than the start of a sustainable recovery or turning point.

8.3 COVID curbs, supply problems darken German investor morale – Reuters

German investor sentiment deteriorated in December as a fourth wave of COVID-19 infections and persistent supply bottlenecks in manufacturing clouded the growth outlook for Europe’s largest economy, a survey showed on Tuesday.

The ZEW economic research institute said its economic sentiment index fell to 29.9 from 31.7 points in November. A Reuters poll had forecast a steeper fall to 25.1.

“The German economy is suffering noticeably from the latest developments in the COVID-19 pandemic,” ZEW President Achim Wambach said in a statement, adding that persistent supply bottlenecks were weighing on production and retail trade.

The index for current conditions dropped to -7.4 from 12.5, compared with a consensus forecast for 5.0.

“The decline in economic expectations shows that hopes for much stronger growth in the next six months are fading,” Wambach said, adding that earnings expectations had soured particularly among export-oriented and consumer-related industries.

Recent economic data has painted a mixed picture of the German economy at the start of the final quarter of 2021.

Comment: Like clockwork and before most European economies are able to close to COVID GDP gap, we’re starting to see weakness. The pandemic isn’t helping. Neither is the fact that supply chain issues are persistent.


9.1 Only 5.7 of 27 billion euros spent: In Spain, project allocation for the reconstruction fund falters massively – Handelsblatt

When EU heads of government agreed on the European Reconstruction Fund in the summer, Spanish head of government Pedro Sánchez was applauded by his cabinet on his return from Brussels. The EU’s fourth-largest economy will receive 70 billion euros in non-repayable aid from the European reconstruction fund – more than any other country. The money is intended to help combat the consequences of the Corona pandemic and make the Spanish economy fit for the future. But the allocation of the EU billions is not picking up speed.

Sánchez wanted to spend 27 billion euros of it right away this year. But by October, according to calculations by economist Raymond Torres based on the government portal, just 5.7 billion euros worth of tenders had been launched – 20 percent of the plan. Companies complain about the slow implementation. The government is now doubling its weekly meetings and wants to step on the gas by the end of the year.

“If the money is slow to flow, and thus the short-term stimulus for the economy is missing, the quality of the projects must be all the better,” says economist Torres, head of economic analysis at the Foundation of Spanish Savings Banks, Funcas. “The projects then have to really kick-start the transformation of the Spanish economy.” So far, however, there’s been no sign of that, he says; the money has so far gone mainly to projects that are easy to implement, such as energy insulation for buildings.

The corporations are frustrated. They already have their plans for the expected tenders in the drawer – and are waiting for things to get started. The government has promised the carmakers that it will launch the tender for the e-car by the end of the year. Only then can the companies submit their bids for the projects specified in the tender. In the next step, the Spanish authorities will award the contracts and only then will the money from Brussels flow to the companies.

[…] The sparse flow of EU funds also means that there will be no strong impetus for growth this year. The EU Commission expects Spain to grow by only 4.6 percent this year – less than the EU average. This is despite the fact that the economy has slumped by 10.8 percent in the pandemic – more than in the other countries. However, high electricity prices in Spain and global supply bottlenecks are also responsible for the muted growth forecast.

Comment: In times when growth is mainly fueled by stimulus, it is not acceptable that Spain isn’t spending other country’s taxpayer money fast enough. All kidding aside, the EU needs Spain to spend its money as it’s tied to guidelines. This way, the EU (indirectly) gains power over country’s spending. In this case, it would go a long way as its economy is set to meet the impact of a new pandemic wave that could do significant damage to its tourism industry.

The graph below shows that Spain is significantly lagging other EU countries in the still ongoing recovery.


10.1 How Erdogan’s Pseudoscience Is Ruining the Turkish Economy – CATO Institute

One of the most startling stories in the world these days is what the Wall Street Journal recently called “The Erdogan Lira Crisis.” The crisis is that Turkey’s national currency has been plummeting at an astonishing rate: in 2012, 1 U.S. dollar equaled 1.8 Turkish liras. Today, after an accelerating downward spiral of the Turkish currency, 1 dollar equals 13.7 liras.

This economic catastrophe is really an “Erdogan crisis,” because its key factor is what experts have called “Erdoganomics”: Turkey’s all‐​powerful president believes in a bizarre economic theory that if the central bank lowers the country’s interest rates, it will lead to lower levels of inflation.

Which is exactly the opposite of what Economics 101 will tell you. (Hence in 2015, when Erdogan began pushing for his theory, a former head of the central bank, a sane one, said that to believe in this theory, one must “burn the books of Adam Smith.”) Yet President Erdogan doesn’t care much about such conventional wisdom, which for him means “Western,” which also means worthless. “We don’t care about what George or Hans says” he declared repeatedly in the past five years, in populist denigrations of the Western standards of liberal democracy and the market economy. (Which are the very standards he used to follow in his earlier years in power, when he was not yet overtly ideological and arrogantly unrestrained, making Turkey then quite successful.)

[…] Erdogan, a veteran of Turkey’s Islamist movement, seems to be committed to this ideological construct, which he apparently cannot distinguish from being a pious Muslim. That is why, he recently defended his relentless war on interest rates by saying, “there is nass [Qur’anic decree] on this; so what is up to you or me?” In other words, he presented his economic theory as a religious truth that good Muslims should not question.

[…] Which brings us to Turkey’s real problem. It is not just that there is an ideologically delusional and personally hubristic president. The real problem is that this president has unlimited power. Throughout the past decade, with all the well‐​tailored constitutional and legal redesigns, as well as dirty tactics of patronage and intimidation, Erdogan has taken control of the whole state apparatus: the executive, the legislation, and the judiciary. He has also taken control of some 90 percent of the media, all universities across the nation, and the central bank, which controls the Turkish lira.

[…] Whether Turkey will find a way out this nightmare soon, before it gets worse, is unclear. There are elections scheduled for June 2023, and polls show that this time Erdogan may be finally defeated. But whether he would accept defeat is a difficult question with no clear answer.

Yet there is something else that is clear: In the past decade, Turkey has experienced a growingly deepening autocracy, which has proven increasingly destructive. It is a sad story that confirms that good‐​old liberal lesson, proven repeatedly throughout world history:

Comment: One takeaway is that Erdogan does not understand economics. However, that’s a topic we have covered frequently in recent weeks. What is even more important to mention – and this article covers it very well – is that he has simply too much power. Nobody who didn’t vote for him expected something good to come from his power grab, but the real issue is: how is this economic problem going to be solved? After all, who knows if he will accept the election results if he loses