The European Paradox

In the depths of a seemingly unending energy crisis in Europe, predicting the endgame has become near impossible. But the so-called European Paradox might hold the answer

After a series of botched negotiations at the end of a cold winter in 2009, Russia, through its majority state-owned energy firm Gazprom, cut off major gas supplies to Ukraine. Stemming flows completely, after Ukrainian gas company Naftogaz failed to pay numerous debts on previous supplies, Putin detached the whole of Southeastern Europe from the energy it had once used to thrive. In what would likely produce a spell of Deja Vu following the recent events in Europe, this gas dispute had all the hallmarks of a looming energy crisis.

Compared to today’s climate, however, geopolitical tensions back then were as calm as a GenZ investor buying the dip during central bank interventions. After a flimsy attempt by the European Union to solve the conflict, Vladimir Putin and then-Prime Minister of Ukraine, Yulia Tymoshenko, signed a new decades-long agreement two weeks later. Gas flows recommenced through to Europe. A crisis was averted. For then, at least.

Discovering, in the dead of winter, the newfound urge to obtain energy security and independence, the most vulnerable countries involved in the quarrel decided it was time to wean themselves off Putin’s prime exports. The idea of once again needing to ration energy, shut down industry, and turn off power supplies initiated a mad dash by many nations to lay pipelines, connect grids, and build terminals to import LNG (Liquified Natural Gas) from countries such as Qatar and the United States.

Fast forward to today, in a bizarre twist, these have become the goals of countries that barely attempted to cut ties with Russia when it mattered. Instead, countries like Germany assumed they could gorge on Putin’s gas without any geopolitical consequence, only to run into the biggest one of all: a shortage of energy. To the nobility in Europe, 2009’s geopolitical landscape offered them ample opportunity to use Putin’s gas, and they took it. And despite the clear benefits of using carbon-neutral energy sources, Germany shunned nuclear power.

Today, those decisions have come back to bite them, in speculator fashion. Even though has Putin shut off gas to Europe and turned Russia into a long-term glorified gas field, the short-term effects of Europe’s Force Majeure with Russia have created “first world” problems. Though having attained above-average levels of gas storage, Germany’s energy regulator (Bundesnetzagentur) announced that savings of at least 20% would be needed to deter a shortage of fuel this winter. Sharing sentiments in a crisis partly of his own making, Germany’s economy minister Robert Habeck told reporters yesterday the European energy crisis threatened “to grow into an economic and also a social crisis.” Was this the turning point where European elites might accept that cleaner-burning fossil fuels needed to play a part in Europe’s transition toward carbon neutrality, in order to avoid energy and financial austerity?

The U.K provided clues to this enigma. Last week, U.K Prime Minister Liz Truss declared what most of the British population considered a jaw-dropper, lifting a temporary prohibition on the fracking of natural gas, plus announcing a fresh round of over 100 oil and gas licenses for North Sea exploration.

This, however, will prove to be a repeat of the Brexit shock and the subsequent lack of follow-up from France to elect Marine Le Pen and keep the populist wave going. Again, we’ll see a historical rhyme through the lens of energy.

For energy bulls expecting the U.K’s fossil fuel capitulation to flood overseas onto the European mainland, this provides false hope. Instead, Concoda predicts the doubling down of policy that will create energy deficits. Puzzled onlookers, especially our subscribers from within the commodities sector, will witness the latest episode of what we call the paradox of European integration, where decisions that many believe would increase tensions to the point of inevitable bifurcation, only end up increasing the EU’s size and power.

The blindspot we’ve detected in many analyses (that we respect) is seeing this crisis through a singular lens. Understanding Europe means understanding that politics and culture matter more to the average voter than energy security and the costly bill that deserting it entails. European nations, led by Germany, are surrendering abundant energy and affordability to suppress Putin’s proliferation into Europe and to meet climate objectives at a seemingly infinite expense. Without looking at European citizens’ overwhelming support for the EU, it only takes a glance at one recent survey out of Germany to show the staggering disconnect of priorities between mainland Europeans and the British — plus those observing from further afar in total disbelief.

Concoda 🥷 @concodanomics

70% of Germans are willing to stomach higher energy prices to support Ukraine. This is what I was saying about a huge disconnect between fintwit and the average European voter.

As we tweeted earlier this month, “70% of Germans are willing to stomach higher energy prices to support Ukraine.” We were teased many times for merely tweeting this. If we had a nickel for everytime someone replied with “we’ll see how they feel after winter” we’d be richer than Olaf Scholz. But jokes aside, these responses only prove our point and give us more conviction, plus the incentive, to share the view that Europe will not only fail to break apart but increase its solidarity in the aftermath. Even if a freezing cold winter awaits them, we expect Europeans will endure alongside bureaucracy. It will be a tough but survivable winter, but a large majority will be willing to stomach energy austerity to cut off Putin from his primary war fund and stick to a minimal fossil fuel dependency wherever possible.

Already under the constraints of a less content population, German leaders have delayed their intended exit from nuclear power generation to the end of this year to bolster scarce energy supplies for a freezing cold winter. Alas, we still expect a long-term phase-out, even though nuclear power gives Germany an ideal carbon-neutral energy source for its transition to net-zero carbon emissions. European politicians will now rely on renewables, coal, and an uncertain global supply of LNG coming onto the market by the end of 2023, in hopes of relieving the continent from Putin’s grip. This is an unreliable supply for winter and next year.

Now the risk of societal unrest lies with the willpower of the European people to cut back on energy usage to prevent rolling blackouts and shutdowns of national power grids; an extreme test of solidarity and the major trial Europe faces.

It is not the commonly touted “hyperinflationary crisis in Europe”. Never in modern history has a developed capitalist economy succumbed to a currency crisis from increasing its stock of sovereign debt to pay for energy. This is no Weimar on a superstate level. Nor has Europe been paying down heavy war reparations or heading towards regime change from a civil war. In fact, the only typical trigger of hyperinflation Europe has experienced is the destruction of its productive capacity. A full collapse is required, but we’re no way near that yet. This involves the total destruction of industry, and energy saving will stem the likelihood (if populations are unwilling to revolt in the face of a 20% haircut in energy usage).

Kamil Galeev @kamilkazani

50 years of German energy policy summarised

Instead, with the news that the Nord Stream gas pipelines have been blown open four times by what many European nations have claimed to be an act of Russian sabotage, we’re about to witness the European Paradox in action, once again. As a result of the pipeline becoming “unusable forever,” the mistakes of politicians cannot be reversed in time to achieve near-term energy security. Regardless, Europe has already socially and politically committed to an energy-constrained transition. The will to defeat Putin and achieve net-zero carbon emissions is not only the long-term goal but the endgame. “Unconventional” energy policies are mere short-term tradeoffs for the average European.

When you look at the crisis through the eyes of the median voter, this round of geopolitical 4D chess will be won almost certainly by “European solidarity”. There will, however, be a concerted effort to omit awful energy mismanagement from memory, when this all blows over.

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