We’ve all seen the headlines and charts of European electricity prices and gas prices. Each time the Nordstream pipeline is serviced, we brace ourselves for Russia to not bring it back. And we brace ourselves for Germany, Italy and likely all of Europe to fall into a deep recession with no easy way out.
I don’t have much to add to the energy conversation other than to remember optimists usually make the most money in investing. But the situation is so untenable.
Since I have no idea how Germany’s chemical and industrial sector will deal with the loss of gas (I’ve read reports, but I don’t know the long-term solution), I decided to jot down what is happening with the Euro currency and if that’s something to stifle the blow.
Unfortunately I just don’t see it.
Here’s my scratch on what could happen. Happy to hear others thoughts
In a nutshell, the EUR has already weakened considerably against the US$. That may help tourism.
Theoretically it helps exports on paper, but this is an interesting situation. How? In fact, Europe has quickly become the highest cost producer of many chemicals and other products. Note BASF and Yara have cut fertilizer production because of the gas cost. That is likely true for many other products. Instead, Europe will need to import these fertilizers from the US.
So generically, if Europe can import products cheaper than it can make, it will have to. And that’s a lot of things at this point given the disparity in prices. It doesn’t help that commodities are typically priced in US$ either. Europe has become a high cost island.
So what can the ECB do? Raise rates? Drive the currency higher? I guess, but the magnitude likely kills the economy anyway.
Do they raise rates but provide stimulus? Do the governments try to take the whole burden? I could see the merit as this is the equivalent of war time spending. Maybe that helps the currency as investors see Europe is building a sustainable path out.
Do they do nothing? Hmm.
Should the Euro be disbanded? Maybe the countries that have cheaper power may want this. Maybe they wouldn’t.
Will the U.S. benefit? I could see our chemical and industrial sector get a larger boost as the low cost producer. But it will also drive up our energy costs, as we’ve already seen with natural gas hitting $9 again. The U.S. Fed also probably wants a stronger currency as it helps tame our inflation. But it is a bit easier being the reserve currency to strengthen when Europe is in such a troubling situation. It is also hard to imagine the US being unscathed in a major European recession.
Should the US conduct some sort of defense era production act? Drill baby drill, but in our own country? Some sort of Marshall plan? I see the merit, but do US voters?
We shall see!