Europe’s Perfect Storm
From a perilous energy crisis, to policy tasked with both tackling rampant inflation and supporting indebted nations, to unforeseen elections, Europe is facing a perfect storm of uncertainty. How do we make sense of it all?
Dilemma 1: An energy crisis that just keeps getting worse
The war in Ukraine and knock-on sanctions have upended energy supplies in Europe – the continent has traditionally imported a quarter of its oil and almost 40% of its natural gas from Russia.
Europe typically receives over a third of its gas through the Nord Stream 1 pipeline, which connects Russia to Germany. Despite resuming pipeline flows recently after maintenance closure in July, it’s estimated the pipeline is only operating at 30-40% capacity. Meanwhile, Russia hasn’t upped gas channeled through other pipelines via Ukraine to compensate for the shortfall. Countries are working to stockpile gas reserves ahead of winter, and it is possible tanks are successfully refilled to 80% of their capacity to get through it. Yet, some countries are more vulnerable (Germany, Italy) than others (United Kingdom, Sweden) – a dynamic that could lead to political squabbling over how best to send gas where it’s needed most.
Dilemma 2: European Central Bank (ECB) playing offense
With the energy crisis ongoing, commodity prices have pushed inflation across the Eurozone to record highs. Like the Federal Reserve, the ECB needs to tighten policy to have a fighting chance at price stability. Its 50 basis point hike ends an era of negative interest rates in the largest economy to ever try them.
Yet, given the Euro area is a monetary union, more is at risk as the ECB goes on the offensive. As credit conditions tighten, more indebted nations such as Italy can feel the effects more acutely than wealthier member states such as Germany. The danger is that this fragments the single market, and ECB policy fails to transmit across all members in the same fashion. With that in mind, the ECB further unveiled an “anti-fragmentation” tool to combat that risk, but how effective it is (if ever used) is still to be determined. Details are still lacking, and markets are certainly questioning it – the spread between Italian and German government bond yields spiked higher and are already at their highest levels since the Covid crisis. That said, it’s clear policymakers are serious about containing
the risks.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
