Last weekend was a busy one in European energy policy.
The German government revealed a €65 billion (A$96 billion) support package for consumers and small to medium businesses. That includes the government taking a 30% stake in the private gas utility, Uniper, in exchange for a €15 billion bailout (something the Australian government should have done to Qantas during the pandemic).
On Sunday Italy’s finance minister said his country would send €100 billion offshore to pay for the country’s energy import bill, more than double last year’s €43 billion bill. It amounts to around 3% of GDP.
But that was just preamble to the main event further north: the Swedish government — up for election next weekend — announced it would bail out its energy companies immediately to stop them going broke on Monday morning. Finland then said it would act in concert with Sweden.
The US$33 billion (A$48 billion) offers of liquidity guarantees by Sweden (US$23 billion) and Finland (US$10 billion) to power companies came after Russia’s Gazprom shut the Nord Stream 1 gas pipeline on Friday, deepening Europe’s energy crisis and sending gas prices higher on Monday. Russia has since said it would not be opening the pipeline again until Western sanctions were lifted.
The bailout was launched to keep electricity companies solvent so they can continue to finance energy deals at Swedish-owned clearing house Nasdaq Clearing in Stockholm, where energy companies hedge their daily energy purchases and sales.
The surge in gas prices in the past couple of weeks meant electricity companies were being asked for more and more collateral to stop their hedges from collapsing. But on Friday, Scandinavian energy companies all but ran out of money and would have been technically insolvent. Governments faced the prospect of a Lehman Brothers-style implosion that could have triggered the collapse of Nasdaq Clearing, in turn triggering a knock-on impact in other markets in the EU, UK and at Nasdaq in the US. Luckily, US markets were closed Monday for the Labor Day holiday.
Reuters reported that the collateral requirement on Nasdaq Clearing recently reached 180 billion Swedish crowns, up from around 25 billion in normal times due to the surge in power prices. European gas prices soared 30% in early trading on Monday, pushing the euro below 99 US cents on Monday, which will itself push EU inflation up further than the current rate of 9.1% in August.
Millions of jobs are being threatened as companies across the EU cut production. An estimated 75% of European metal processing and fertiliser companies have either cut production or closed because they can’t afford to remain open. A Swiss steel mill revealed at the weekend that it is preparing to slash production, as is a big German steel mill owned by ArcelorMittal, the world’s biggest steelmaker outside China. Dozens of German companies are already curbing output because they can’t afford to pay electricity and gas bills to keep their factories operating and heated.
In the UK, the government has been paralysed by the drawn-out and self-indulgent Tory beauty parade between Rishi Sunak and Liz Truss. Big energy companies are demanding that Truss not merely prepare a package to help UK households, but prop up UK small businesses, pandemic-style, through the winter. The UK government’s debt, after years of deficits, is around 100% of GDP.
In France, the Macron administration has used its ownership of nuclear power giant EDF to curb energy price rises to just 4%. Two-thirds of French electricity is sourced from nuclear reactors, although many reactors are currently offline; EDF is in the process of restarting as many as possible as autumn sets in.
The only comfort for the Europeans is that, now that the Russians have shut off gas supply, it shouldn’t get any worse than this. The Putin regime has played its trump card (no pun intended) but has nothing else in its economic armoury if a shivering Europe continues to back Ukraine.
It’s a good time to be an energy exporter. For all our relatively minor problems here, Australians can’t begin to imagine the kind of power bill shock European households and businesses are experiencing.
