Will Australia Prosper or Profit from the Latest Eurozone Crisis?

Will Australia Prosper or Profit from the Latest Eurozone Crisis?

In 2018, I moved to Europe to watch the place implode. Watching an economic crisis from up close seemed like an exciting idea after a decade and a half in recession-free Australia.

I predicted that Italy’s election would trigger chaos. And, on cue, financial markets had a meltdown as Italy looked set to leave the eurozone.

But, in the end, the Italian Government backed down, as Greece’s had in 2014. They never acted on their electioneering threats to undermine the EU or the eurozone. Despite the Italian prime minister calling the euro a ‘crime against humanity’.

Still, 2018 was the worst bout for financial markets since 2008. And being in the middle of it was fascinating.

By 2020, I’d had enough of Europe’s endless crises. Raising a family in that madhouse suddenly seemed like a very bad idea. We escaped London’s second lockdown by a few hours but got stuck in Japan for a year and a half on the way home because of Australia’s border policies.

And now, from a safe distance, I’m watching Europe’s latest implosion. The muppets really are doing a first-rate job of it this time.

Top of the list of current shemozzles is energy policy. The most recent debacle in a long line of energy disasters is the sanctions on Russia.

As part of the attempt to go green, Europe relied on Russian energy. Nuclear and coal plants were shut down, as was domestic gas production.

So it was a deliberate effort to outsource energy to places with fewer ESG constraints. Out of sight, out of mind, and much better for the environment…the political environment, anyway.

Under the new system, European energy importers had cheap long-term deals with Russian gas providers. This meant that if the energy price were to spike, Europe would go on getting cheap energy anyway under those long-term deals.

Donald Trump warned about the risks at the UN:

Germany will become totally dependent on Russian energy if it does not immediately change course.

The German delegation laughed at him in disbelief. While Trump was accused of being Putin’s stooge…

Putin, realising the opportunity, decided to make a grab for Donbas — the Eastern part of Ukraine. And the Europeans fell right into his trap.

They decided to sanction Russia — their most important source of energy. And so those long-term, cheap energy agreements were cut short.

But where else can Europe buy its energy from? It turns out that nowhere can meet the shortfall, especially in the short term. The infrastructure to import it simply doesn’t exist, even if the gas supplies were out there.

In the end, the Europeans had to slink back to Russia for their gas. But the price had since shot up because of the crisis. And the new deals are being done at the spot price, not under long-term contracts anymore, because of impending sanctions.

And so, what would typically be a gradual energy price shock — the sort that other countries are experiencing under long-term energy contracts — became a horrifying immediate price spike that has caused chaos in European households and industry.

It’s one of the dumbest policy moves out there. You can’t make a continent reliant on Russian gas, sanction it, and then buy it at a much higher price.

And the consequences are horrifying.

Bild, which I believe is the top-selling tabloid-style newspaper in Germany, had this headline as its top story: ‘It was only this bad after the Second World War’. What was the quoted man referring to? Rationed hot water and washing only at scheduled times!

Hamburg’s senator, who’s responsible for ‘all sorts of important things other than the climate’ according to his website, is also warning that hot water will be rationed in the city.

For the first time since the Second World War, Waermehallen — warming halls — are proposed to help people whose heating has been turned off. A vague threat that has already begun to play out for some renters at night-time.

You might’ve heard about the scramble to fire up old coal power stations. It’s all very ironic that the attempt to go green has led back to coal. But Deutsche Bank reckons Germans will have to turn to burning wood to heat their homes this winter!

The German Government is even looking to pull gas supplies to parts of the economy in order to build up a supply buffer for winter. Imagine having your government cut your gas…

It’s remarkable how quickly the crisis has had an impact beyond energy bills. The people are holding their so-called representatives to account.

Governments in the UK, Bulgaria, Israel, and Estonia have fallen. Italy is next. The French and German governments are hopelessly split into bizarre standoffs. No-confidence votes are taking place everywhere.

Protest movements in the Netherlands, Germany, Belgium, Ireland, Spain, and the UK are on the move. Strikes are shutting down transport industries and food supplies across Europe.

The problem with an energy crisis is that it takes many years to cause one and many more to fix it. That means politicians can get elected based on very stupid policies long enough to make a career of it — leaving the consequences to hit once they’re gone.

Germany’s top tabloid calls the situation ‘Merkel’s cold inheritance’ — a reference to the chancellor who sabotaged Germany’s energy and then bowed out, just in time to avoid the chaos.

But it’s not like the incoming crop of policymakers, whomever they might be, will solve the problem somehow. Even giving in to Russia over Ukraine won’t resolve the underlying issues because new long-term contracts will have to be negotiated with Russia. If the gas isn’t already spoken for in India and China, that is…

Where does Australia stand in this mess?

First of all, we stand to profit. We’re already profiting handsomely. Coal just surpassed iron ore as Australia’s top export. We’re an LNG powerhouse too. And the higher prices will eventually make their way into the long-term contracts under which Australia sells its energy resources.

Investing in the companies that profit from higher coal and gas prices has been one of the very few strategies that’s worked over the past six months.

But what about our domestic economy and our own energy policy?

Well, we face a choice. We certainly have plenty of energy sources we can use. The question is whether we use them or follow Europe’s mad policies into an energy crisis while exporting the energy resources that we could be using.

So far, we’re making the same mistakes as Europe. Blackouts are in the news often enough. As are energy shortages. This is an obvious policy debacle — a conscious choice to lack energy while sending it abroad to be used elsewhere.

In fact, it is downright bizarre given we export the energy sources that get burned elsewhere. Why not burn them here instead — get power and sell our resources too?

The good news is that Europe’s crisis is set to get so severe this winter that it might just wake up Australia’s policymakers in time to avert our own decline into the same mess.

Unlike Europe, it won’t mean electing dangerous politicians to solve the problem. I hope…

Until next time,

Nick Hubble Signature

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend