Europe Macro – December 28, 2021

| December 28th, 2021

In today’s issue, we cover a mix of interrelated inflation, supply chain, and energy topics. It becomes increasingly obvious that inflation is not temporary but here to stay. Meanwhile, climate measures accelerate demand for metals, which is causing the EU to seek emergency powers on supply chains. And, as we head into 2022, it’s important to once again discuss that Germany is shutting down climate-neutral nuclear reactors to (temporarily!) replace them with natural gas plants.


1.1 Commerzbank CEO warns of growing danger of inflation – Handelsblatt

Commerzbank is bracing itself for headwinds in the coming months. “2022 will be a challenging year not only because of the Corona crisis,” warns CEO Manfred Knof in an interview with Handelsblatt. “Inflation is a burden on many of our customers, especially the increased energy and real estate prices.” In addition, there are still problems with supply chains and major geopolitical risks as a result of the pandemic. 

Germany’s second-largest private bank, however, sees itself well prepared for impending loan defaults and also wants to take advantage of growth opportunities. “In the private client segment, we will continue to expand the securities business and construction financing,” Knof announces. “We also expect very solid business with German SMEs, both in terms of lending and bond placements.”

Comment: Commerzbank Knof is seeing problems that we highlighted over the past few months – especially when it comes to the state of the consumer and ongoing supply chain problems. According to him, “we cannot expect an economic tailwind. 2022 will be a challenging year, not only because of the Corona crisis. Inflation is a burden for many of our customers, especially the increased energy and real estate prices. In addition, there are still problems with supply chains and major geopolitical risks as a result of the pandemic.”

Even more important is that inflation is proving to be persistent. Handelsblatt covered three reasons that explain why inflation is not transitory. 

Reason one is the ECB:

“The European Central Bank’s (ECB) latest decision was a cautious one – yet most understood it as a tightening of monetary policy. The central bank wants to abandon its crisis programme for the purchase of bonds. However, it wants to continue its normal bond programme and even increase it in the meantime.

Above all, however, ECB representatives had repeatedly communicated that they would only consider interest rate hikes as an option if the central bank stopped buying new bonds. However, ECB President Christine Lagarde has not announced an end to the programme.

[…] What is more important is what she triggers in the citizens. This is measured by inflation expectations. “With its current decision, the ECB is fuelling inflation expectations considerably,” says Alexander Kriwoluzky, Head of Macroeconomics at the German Institute for Economic Research (DIW).”

Another reason is the weak euro (Germany is importing inflation):

“While the ECB is holding back, other central banks have moved ahead. The US Fed has indicated three interest rate hikes for 2022. The Bank of England has immediately raised its key interest rates. This increases the pressure on the ECB, especially because of the danger of imported inflation.

As prices rise, the value of each euro decreases. Companies have to pay more euros for raw materials from abroad, for example. The companies often pass on the higher costs to their customers.

This can become a compounding trend. “A further devaluation of the euro and thus even more imported inflation are fairly certain,” says Bert Rürup, President of the Handelsblatt Research Institute.”

Reason number three is changing demographics:

“In addition to the build-up effects, another fundamental development can drive inflation: the demographic turnaround. The declining share of the working-age population tightens the supply of labour and argues for rising wages and thus higher inflation. In Germany, the massive ageing push will start as early as the middle of this decade, when the baby boomers retire, and last for about two decades.

The problem could be solved by labour migration if it only affected Germany. But the ageing spurt is affecting the western industrialised countries as well as Japan and China. Economists Charles Goodhart and Manoj Pradhan have predicted in their book “The Great Demographic Reversal” that inflation will rise significantly within the next three decades.”

With regard to changing demographics, Welt reports that Germany will face rapidly rising costs for social issues like healthcare and retirement benefits. The largest increase in taxpayer contributions will occur over the next four years.

Note that Handelsblatt did not mention climate measures. The EU is pushing for strict measures to reduce global warming. This will be inflationary – it already is. Think of carbon certificates, investments to make homes climate neutral, higher taxes on petrol and diesel, and many more policies that will hurt the consumer.

Long story short, we’re in for a prolonged period of above-average inflation, which is not unique to Europe and not the consensus according to our research focussed on the United States.


2.1 EU seeks emergency powers on supply chains – POLITICO

The European Commission is planning to unveil a proposal early next year for new powers that would allow Brussels to secure supplies during a crisis, according to an internal message seen by POLITICO’s Brussels Playbook.

Europe has encountered serious vulnerabilities in its supply chains over the past year on a number of fronts. The EU was caught flat-footed in the coronavirus vaccination race and had to take contentious measures to limit exports and keep jabs in the bloc. That crisis only compounded existing worries about dependence on Asia for critical imports ranging from face masks to microchips.

In particular, the European Union worries that 98 percent of the rare earth metals that it needs in a host of industrial applications come from China. A shortage of magnesium from China has also become a major headache for producers of cars, planes and electronics.

In a New Year’s message to his staff, Internal Market Commissioner Thierry Breton said Brussels would present the new law in the “spring.”

The law will consist of a “toolbox of measures that can be activated to ensure security of supply during a crisis,” Breton wrote, which could mean export controls and powers for the EU to request information from companies on production, stockpiles and their supply chains.

It would also include “mid-to long-term measures … to address structural strategic dependencies, diversify sources of supply and increase EU industrial capacities.” Officials say this will include measures aimed at reducing the EU’s dependence on China.

Still, Europe’s supply chain woes during the pandemic had internal as well as external causes, in part triggered by border restrictions and bans on medical equipment exports within the bloc. France seized mask shipments moving across the EU that passed through its territory, and Germany imposed unilateral export bans. France maintained its national export restriction on masks even after the EU had imposed one for the entire bloc.

European Commission President Ursula von der Leyen first hinted at the new law in a speech earlier this year, when she said Brussels was “working on a Single Market Emergency Instrument” to “ensure the free movement of goods, services and people, with greater transparency and coordination … [and] fast-track decisions, whenever a critical situation emerges.”

Comment: Last month, Thierry Breton made clear that he wants to double the EU chip production until 2030. The EU has also planned to become climate neutral, which means the demand for rare earths will explode – we cover this in the article below.

Moreover, as @nglinsman noted, “The worry here is that the EU pushes prices higher, competing rather than collaborating. Just look at its recent debacles – energy prices (EU didn’t block Nord Stream 2 or facilitate nuclear), vaccine procurement, CAP policies, etc.”

2.2 2022 will be the year of the electric car for Germany – Welt

After the rapid rise of electric mobility this year, Germany is heading for new records in new registrations of electric cars in 2022. As an evaluation of the Center of Automotive Management (CAM) by Stefan Bratzel shows, the market share of pure e-cars has increased almost every month since January. For the current month, the car expert expects an E share of 23 percent of all new registrations. According to his forecast, every fourth new car sold next year will be powered by an electric motor.

The driving factors behind the boom are obvious: First, it is the lavish purchase premium of up to 9,000 euros per vehicle, which the new Federal Minister of Economics, Robert Habeck (Greens), has just extended for one year. Secondly, the massive marketing by the car companies and the many new models are having an effect on customers.

Thirdly, many e-cars are now cheaper than petrol cars in terms of overall costs, new calculations show. This ratio will continue to change in favour of electric cars – and with it the buying behaviour of car drivers. What is holding things back is the lack of public charging stations. The development of this infrastructure is lagging mercilessly behind the growth rates of the e-fleet.

Nevertheless, 2022 will be the year of the electric car. Bratzel expects 450,000 new registrations of pure electric cars next year, compared to around 350,000 this year. The CAM estimate could even be exceeded in December. Last year, car manufacturers had already delivered an extremely large number of battery-powered vehicles shortly before the end of the year.

Comment (The Times): […] Unfortunately, EVs are careering towards a giant pothole — there isn’t nearly enough metal around to put in all the batteries we need. The race is on to develop deposits of lithium, nickel, cobalt and the jumble of other metals that make up a car battery. One noted mining investor predicts the coming boom will dwarf the supercycle in commodities unleashed by China’s rapid growth 20 years ago. Another executive says we are “moving from an era defined by fossil fuels to one defined by metals”.

Where is all this metal to come from? Deposits of some minerals are widespread but not easily accessible. And they may be in jurisdictions where companies do not want to operate. Take cobalt, 70 per cent of which is from the Democratic Republic of Congo, where the government likes to whack foreign mining companies for tax at a moment’s notice, and where dangerous “artisanal” mining by ordinary folk equipped with little more than a pickaxe is common.

Just to meet the goals set by the Cop26 climate conference would require 7 million tonnes of lithium annually by 2040 — 17 times more than this year’s production, says data firm Benchmark Minerals. It predicts that a recent surge in lithium prices will push up EV battery costs by 16 per cent next year.

Received wisdom tells us that as goods become mass produced, their price falls — but it is plausible that the cost of EV batteries will rise. This would sabotage the UK’s goal of slashing emissions, stalling EV uptake just as it is gaining momentum. And the government’s decision this month to slash subsidies for the buyers of EVs won’t help.

To solve the supply conundrum, carmakers are striking strategic deals with suppliers — but China is one step ahead. Sales of EVs there are expected to double next year, and Beijing-backed companies have been buying up supply left, right and centre for much of the past decade. Most of the processing of these metals is already carried out in China. And last week, Chinese group Ganfeng sealed its £285 million takeover of London-listed Bacanora Lithium.

Western miners will most likely need to buy their way in to catch up; last week, Rio Tinto splashed $825 million on the lithium project of Rincon Mining in Argentina. Such steps can help assure carmakers that their metals are ethically sourced and free from the child labour that blights mining in some countries.


3.1 Energy customers face the next shock at the turn of the year – Handelsblatt

The turbulence on the global energy markets is driving up the annual costs for private energy consumers by several hundred euros. In 2021, the prices for electricity, gas and heating oil have risen more than ever before – and at the turn of the year, millions of customers will have to accept further price increases.

Since the beginning of the year, the average consumer price for electricity has risen by 18.4 percent. At the beginning of the year, a sample household with an annual consumption of 4000 kilowatt hours (KWh) had to pay 1171 euros, but in December it was 1386 euros. This means that electricity has become 215 euros more expensive per year for such a representative household.

This is the result of an analysis by the consumer portal Verivox for the Handelsblatt. And it will be even more expensive at the turn of the year. For January and February 2022, 280 of the approximately 800 regional electricity suppliers in Germany have already announced electricity increases of 7.6 percent on average. That means additional costs of around 98 euros per year for the representative household.

The situation is no better for gas: Currently, the annual costs of a representative household with an annual consumption of 20,000 kilowatt hours are on average 1704 euros per year. At the beginning of the year it was still 1162 euros. The household thus has to pay 46.6 per cent more, or 542 euros.

[…] Consumers are suffering from the sharp rise in prices on the wholesale markets. For electricity alone, a megawatt hour (MWh) to be delivered in the coming year had become more expensive on the futures market from 51 euros to 252 euros in the current year. The price has thus increased almost fivefold. In the long-term average, a MWh cost between 35 and 55 euros.

There are many reasons for the price rally: the cold winter last year, a poor yield from wind energy, rising prices for coal, oil and gas due to the strengthening global economy, which also drove up the price of electricity – and a nervousness in the markets due to the tensions between gas exporter Russia and Ukraine.

Comment: As we head into the new year, we need to be aware of one thing: the energy crisis would not have been this bad if it weren’t for climate goals and environmentalists who have no basic understanding of supply chains and the economy. Matthew Lynn covered it brilliantly in an article called “Politicians should be ashamed of their opposition to fracking”, which highlights the need to extract the shale oil and gas quantities in the United Kingdom, France, and Poland. 

“Supplies of natural gas from Russia have fallen, the market for LNG arriving on tankers from countries such as Qatar has become very tight, and storage facilities have been allowed to run down. The result? A classic bear market squeeze, with prices spiralling. A few hedge funds that called it right will be reporting vast profits very soon. Everyone else will suffer, and there are already calls for yet another expensive government bailout to cover the cost.

Here is something odd, however. While gas prices are soaring in Europe, in the US they have barely moved. Measured by oil barrel equivalent, US gas is at slightly over $70, compared with more than $220 on this side of the Atlantic. The difference? The Americans turn their thermostats down? They put on an extra couple of jumpers? Not exactly. In fact, they use more power than we do. But the US has a huge shale industry, with industrial scale fracking. And we don’t.

That is not because there is any shortage of shale oil and gas. In truth, there is a huge amount of the stuff. The Bowland Shale Reserve that stretches across the North of England is estimated to hold 37 trillion cubic metres of oil and gas. There is plenty more in the Weald Basin in the South, stretching from Tunbridge Wells to Winchester, and even more in Scotland and Northern Ireland. France has vast reserves (an estimated 137 trillion cubic feet) and Poland has even more. In short, there is plenty.

The problem is no one is allowed to extract it. France decided on a total ban in 2017, a decision upheld by President Emmanuel Macron, while in the UK it has been put on hold more or less indefinitely, as it has across most of the rest of Europe.

[…] In reality, the anti-frackers that dominated the debate make the anti-vaxxers look like pillars of scientific rationality by comparison. They peddled a toxic mixture of alarmism and conspiracy theories that were completely untroubled by evidence or reason. It is even relatively clean.

[…] Wind and solar power should be providing the bulk of our energy, and the technology is coming on stream to make that both achievable and affordable by the 2030s. And yet, that will take some time. Until then we could have been fracking our way to energy security. The harsh truth is that again and again, a timid policy establishment meekly gives in to extreme views, and sacrifices the medium-term interests of industry and households for a few short-term headlines.”

3.2 The new dependence on natural gas – Frankfurter Allgemeine

On the way to climate neutrality, Germany is increasingly saying goodbye to conventional energy sources. At the same time, the energy supply will not remain free of fossil energy in the foreseeable future. The end of nuclear power plants in one year is already sealed. According to the new coalition agreement, coal-fired power plants are now “ideally” to be taken off the grid by 2030. But even then, according to the government’s plans, gas-fired power plants will still be needed to fill the gaps that threaten the energy supply without nuclear and coal.

A lot is in store for Germany when it comes to restructuring the energy world. The government of the SPD, the Greens and the FDP plans for renewable energies to cover 80 percent of the electricity demand in 2030, for which green electricity would have to more than double. More than half still comes from conventional energy sources and mainly from coal and nuclear power. So green electricity will still not be enough in 2030.

In addition to the significant expansion of renewable energies, the traffic light parties have agreed to build modern gas-fired power plants to meet the growing demand for electricity and energy at competitive prices. While natural gas is to be given more room in electricity generation, the government is pushing back the many gas-fired heating systems: from 2025 onwards, only newly installed heating systems based on 65 percent renewable energies are to be permitted. This means that electricity consumption will also continue to rise for heating in buildings.

The coalition believes itself to be on the 1.5 degree path, which the Paris Climate Agreement set as a goal six years ago to limit the man-made rise in temperature. To achieve this, new power plants are to be built using fossil fuels? After all, gas-fired power plants also produce carbon dioxide (CO2) emissions. However, they are significantly lower compared to coal-fired power or heating oil. In addition, natural gas contributes to the greenhouse gas emission of methane, the extent of which is not exactly clear and which politicians should look at more closely.

Comment: Germany is exiting both nuclear and coal. Nuclear will be phased out next year, coal will be gone by 2030 – unless something major changes. By phasing out carbon-neutral nuclear energy, Germany is now needing new non-carbon-neutral natural gas plants and electricity imports (including nuclear). And, as Frankfurter Allgemeine highlights, it also includes a higher dependency on Russia.

“Natural gas can serve as a bridge here, but it also makes Germany dependent on foreign and above all Russian supplies. The dispute over the controversial Nord Stream 2 pipeline shows the geopolitical implications of this. The new gas pipeline is not essential for supply security, but it increases the possibilities. Lower energy prices are expected as a result.

In any case, the phasing out of nuclear energy and coal-fired power means that Germany will be more dependent on electricity from neighbouring countries. Thanks to the European electricity market, foreign countries can make up for some of the base load that will be lacking in Germany in the future. It would be more reassuring, however, if Germany were in control of its own energy needs. Apart from that, more nuclear power would then come here from France and the Czech Republic, which Germany actually no longer wants.

Much would be gained if the new government thought beyond its four-year term. The course must be set early on for the energy supply in a decade’s time. According to the plans, the path in electricity supply will now run more strongly towards natural gas. This means that much will continue to depend on fossil energy for the foreseeable future. For the planned independence from coal power and nuclear energy, this results in new dependencies.”


4.1 Germany’s Vast Foreign Surpluses Are Finally Falling, Fulfilling an Old U.S. Demand – WSJ

After years of digging in its heels, Germany is on track to reduce its giant foreign surpluses, a potential boon for trading partners like the U.S.

For four straight years through 2019, Germany recorded the world’s largest current-account surplus, making it the biggest creditor to other countries and inviting criticism from international officials.

Successive U.S. administrations have called Europe’s largest economy one of the biggest contributors to global economic imbalances. The International Monetary Fund and the European Union have urged Germany to reduce its bulging surplus, with German officials arguing in return there was little they could do.

Recently though, Germany’s foreign surpluses have fallen as a share of economic output. Germany’s current-account surplus (the current-account balance incorporates both the trade balance and other foreign flows including international investment) is expected to decline to 5.5% of gross domestic product next year, the lowest since 2005 and down from a peak of 8.6% in 2015, according to Germany’s Ifo economic think tank.

The decline in Germany’s surplus partly reflects temporary factors including higher prices of imported energy and massive pandemic-related government spending. But German economists and officials say it could persist as the new government, appointed this month, ramps up public and private investment and hikes the national minimum wage by about one quarter to €12 an hour, equivalent to about $13.60. Wage growth is generally expected to pick up as the nation’s workforce shrinks by an estimated four million workers over the next 10 years, forcing companies to bid up pay.

All that could increase imports to Germany as businesses and households spend more, lowering the trade surplus and the current-account surplus, which is essentially a measure of excess savings in the economy. Germany’s trading partners would benefit, since its foreign surpluses subtract from global demand.

Economists argue that most Germans would benefit, too.

“By keeping more of what is produced in the domestic economy and giving it to the people, and not having these huge surpluses, we can have a much higher return than the old model,” said Achim Truger, one of five economic experts who advise the German government.

[…] Mr. Knot, who sits on the European Central Bank’s rate-setting committee, said in a September interview, “If competitiveness leads you to a situation where you continuously build up claims on other countries but…they cannot honor these claims, then what purpose does it serve?”

Comment: Without looking at the future, Germany did a tremendous job selling its autos, machinery, chemicals, and related products to the world. Prior to the pandemic, the country did more than $2.0 trillion in exports. The bad news – even for Germans – is that the country did not invest. 

“German businesses didn’t transform their savings into higher business investment, says Mr. Truger. “Companies were more or less hoarding,” he said. The German government used its savings to pay down debt and the bulk of its tax revenues to fund welfare payments as opposed to investments.

These choices left the nation with poor infrastructure compared with countries like Sweden and the Netherlands, said Sven Giegold, a senior German Green politician recently appointed to the new government’s Economics Ministry.”

Especially east Germany is behind when it comes to infrastructure and a lot of (large) companies have not invested enough in digital capabilities. 

It gets worse, as workers did not benefit from it either. “As businesses saved, German workers essentially saw no improvements in their living standards for the decade through 2008, even though their productivity was increasing by nearly 1.5% a year, according to ECB research.“

As China – Germany’s 2nd biggest customer – is now turning into a competitor and Germany is faced with rising wages, it needs to transform its economy with more jobs in services. Its exports peaked in 2017 and the country is risking deindustrialisation as we discussed last week. This will result in higher imports and balance Germany’s position in global trade.