Brussels Just Can’t Get It Right
The official narrative: the EU is no longer dependent on Russian gas, the ECB has aggressively moved to fight inflation and the Russian economy is collapsing under EU sanctions. The real picture: the EU still depends onRussian gas, inflation is out of control, and the Russian economy is performing better than expected while the EU economy is sinking.
Energy. As Money magazine correctly put it, the idea of “independence” from Russian gas is an “endless farce”. Yes, the EU has almost reduced to zero its pipeline imports of Russian gas, but it’s buying the same gas, in liquefied form, on the spot market. The Wall Street Journal reported on Oct. 26 that EU gas reservoirs have been filled with Russian liquified natural gas (LNG) , thanks to Swiss-based traders who sold it at market prices!
According to EU Commission sources, imports of Russian LNG “jumped by 41% in the year through August compared with that period in 2021”. In the first eight months of the year, Russian LNG comprised 17% of the total imported by the EU, while the U.S. accounted for 45%, and this figure would be even higher without the limitation of available LNG terminals in Europe. That is one of the reasons why several dozens LNG tankers are waiting off the Spanish coast or are wandering around in the Mediterranean. The other reason, according to Reuters sources, is that they are waiting for the gas prices to go up again.
In conclusion, the EU is still dependent on Russian gas, but it’s paying much more to get it!
Inflation. Preliminary Eurostat data show that inflation hit a 10.7% figure yoy in October – which is the highest ever registered in the Eurozone. In the two largest manufacturing economies, Germany and Italy, inflation was above average, at 11.6% and 12.8%. In the small Baltic countries, it went over 20%, with France coming in at “only” 7.1%, thanks to government measures to control energy prices. As we have always insisted, the root cause for inflation is the decades-long central bank monetary policy. However, as liquidity exited the financial economy and turned to commodities, the hyperinflation of financial assets turned into hyperinflation of energy prices.
Fighting inflation now with monetary measures does not work; that requires an urgent government intervention on the energy markets. So the ECB’s “jumbo” rate increase of 0.75 points on Oct. 27 will not have any effect. Worse, it will reduce liquidity in a situation of liquidity squeeze. Expect a replica of the British bond crisis on a wider scale, at which point the ECB will promptly pump in liquidity on a large scale.
Sanctions: when the first round of sanctions was applied, the EU claimed the Russian economy would collapse in a matter of weeks or a few months, by summer at the latest. We are now at the eighth package, and the IMF and other financial institutions keep revising Russian GDP figures upwards, and GDP figures for Europe downwards. As to the narrative about crippling Russian capacities to finance the war, the Russian current accounts surplus in the first six months of the year stood at over $198 billion , a historical record. The billions of euros poured into the Ukrainian Army have prolonged the war. And the now ongoing destruction of that country’s infrastructure could have been avoided, if the EU had taken a neutral position and pushed for a negotiated solution.