After consistently recording fat pluses over the past decade, the euro area’s trade balance has sunk deep into the red. For years, international trade contributed substantially to economic growth in the euro area. But: “Das war einmal”.
A historic surge in expensive energy imports now that gas supplies from Russia have been completely cut off results in a heavily negative trade balance. As a result, trade is now dragging down growth and pushing up the already sky-high risk of recession further.
The energy crisis is yet another reason for many investors and economists outside Europe to predict the end of the eurozone. While it will take time to build a new business model that does not revolve around cheap Russian gas, however, there is a good chance that we will survive this crisis as well.
Perspective needed
What many ‘experts’ overlook is that part of the extreme energy prices is due to a lack of short-term alternatives. If you want to go on holiday or go to a concert at the very last minute, you pay the main price. The goal of replenishing gas reserves to at least 80 percent as soon as possible has therefore been extremely expensive. This very fact is reflected in the trade balance figures. But if you know you want to go on holiday again next year during the same period, you’ll be cheaper - at least if you try a bit harder.
In addition, things need to be put into perspective. For instance, China finally managed to get through the 2021 coal crisis. The price of thermal coal rose 230 percent between February and October last year.
By comparison, European gas prices rose 300 percent between June and August. However, natural gas has “only” a 15 percent share in total German electricity production, while thermal coal accounts for 60 percent of China’s electricity production.
Financial clout
The energy crisis offers policymakers - who have made a mess of things by focusing too much on the end goal and not enough on implementation - a new opportunity to get the energy transition off to a good start. This is especially true for countries with deep pockets like Germany, which “coincidentally” is also one of the countries hit hardest by the energy crisis.
With a debt ratio of under 50 percent and sky-high inflation rapidly inflating away its already limited debt, Germany has ample resources to build a new energy chain - with a few nationalisations of energy companies going nicely fast. And since Germany’s trade volume with the eurozone is still seven (!) times greater than with China, the benefits of this also largely accrue to our continent.
The eurozone is down, but not out. But that is of little use in the stock market in the short term, however.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland is a former head of multi-assets at Robeco. His chart of the week appears every Monday on Investment Officer Luxembourg.