Europe is once again in the news as a cause of fear in the financial markets. This time it’s not due to Greece or any of the Club Med countries but more due to the EU economy and the Euro as a whole.

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The value of the euro fell to its lowest level in years this week, hitting $1.19 a 15% fall from May and the lowest level since 2005, In response European stocks fell sharply amid uneasiness about whether the region is on the verge of a new economic and financial crisis.

Source NY Times

Source: NY Times.

Stock markets were already under pressure from falling oil stocks as Brent crude hit a 5-year low, interpreted by many as a sign that global demand has collapsed resulting in a glut of oil driving prices down. The markets are betting on the European Central Bank (ECB) introducing sovereign and corporate debt purchases at their next meeting on January 22, a form of “Quantitative Easing.”

Indeed, in the New York Times Jean Pisani-Ferry, an economist who serves as a policy adviser to the French government, is quoted as saying the markets have already priced in the introduction of QE and if the ECB fail to act, the consequences could be dire.

“Disappointing those expectations would bring an abrupt and damaging unwinding of positions: Long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate,” he wrote.

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When we think of countries rich in energy production we think of the US and particularly Texas with its oil and gas industry. We think of Saudi Arabia and its oil, gas and, possibly one day, solar. Maybe we think of Canada and its hydroelectric and tar sands, but per capita the richest energy hub has to be Norway.

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Ah, Little Norway. In terms of population it has just 5 million people and a landmass of less than 150,000 square miles. Much less than Texas and only about the size of Montana. Yet with massive oil and gas reserves, 256 gigawatts of hydroelectric power production, sustainable forests and the potential for tidal power in its fjords Norwegians pretty much top the pile when it comes to global per capita income and ownership of energy resources.

Yet sitting on all that energy isn’t, in itself, terribly profitable. So, copper producers are not alone in hoping to see the country expand its power sharing network of undersea cables with the rest of Europe. Norway just agreed to a $2.4 billion/420-mile subsea cable to carry 1.4 GW of spare hydroelectric supply to the energy-starved UK market, said by some to be teetering on the edge of blackouts if its madcap race to low emissions by 2025 hinders investment in stable supply sources.

The UK is mandated by the Climate Change Act to reduce its 1990 CO2 emissions by at least 80% by 2050, the fourth carbon budget (2023-27) will therefore require that emissions be reduced by 50% from 1990 levels by 2025. Likewise, Germany’s inexplicable early shutdown of its nuclear capacity has left the country dangerously low on generating capacity and actually emitting more emissions than it did 4 years ago when coal-fired plants were brought online to keep the lights burning. Norwegian transmission company Statnett, which already has undersea interconnector links with Denmark and the Netherlands, is said by the FT to be working on a 300-mile subsea cable to Germany at a similar cost to the UK project.

Enterprising as the Norwegians are, they are not alone in driving the interdependence of Europe’s power grids. A joint venture between the UK’s National Grid and Elia, its Belgian counterpart called project Nemo will see an interconnector linking Kent in the UK and Zeebrugge in Belgium that is expected to add an additional 1 GW to the UK’s electrical grid. The UK already has an existing network of international connections between the UK and France, the Netherlands and Ireland. Further connections help the national grids even out the supply from variable sources like wind with demand spikes that rarely coincide across different European time zones.

Copper demand for undersea cabling and associated onshore transmission and facilities will run in the tens of thousands of tons. Local cable manufacturers are hoping much of the business will remain in the EU. As an alternative to investing in yet more wind farms and with the benefit of making more efficient use of existing generating capacity you have to say these projects are welcome and, indeed, overdue. Just a pity they are not being driven by the EU but left to commercial interests to make them happen, but, then again, left to the politicians they would probably still be on the drawing board.

As an example of the fine pursuit of high ideals, Germany’s drive for clean energy could not be finer. Whether you hold to the majority view regarding the arguments on global warning or you are one of the naysayers is not the point, the world only has so much fossil fuel and almost no one would deny the world can only absorb so much carbon dioxide without eventually impacting the environment, so a move to less polluting renewable power is a fine goal. But as an example of how not to do it, Germany could not be offering a clearer picture.

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The FT reported this week on Berlin’s dilemma, ambitious at the best of times under a policy known as Energiewende, or “energy change,” the government aims to derive 80% of Germany’s electricity from carbon-free sources by 2050. As a result of generous subsidies since 2000, the renewables sector has grown to provide over 25% of Germany’s electricity today, at a huge cost to consumers. According to the FT, German households pay twice as much for electricity as their US counterparts, while prices for industrial customers have risen more than 30% over the past 4 years, no doubt adding to the challenge faced by Germany’s economy teetering on the edge of recession.

For some bizarre reason, Angela Merkel promptly closed 8 of the country’s 17 nuclear reactors following the Fukushima nuclear disaster. Where the connection between Japan’s tsunami and Germany’s inland nuclear plants comes from is a mystery to most outside the country, but in a society still sensitive to the risks of nuclear energy in the aftermath of the 1986 Chernobyl disaster, there is widespread public support for the closures. The result, though, is that the environmental targets have taken a backwards lurch as coal-fired power stations have been fired up to meet demand. It’s worse in Germany than elsewhere because the country’s coal-fired power stations are reliant on the lowest-grade. most-polluting lignite coal, a resource which Germany has in abundance.

Germany’s 2050 goal may yet be achieved. but the evidence so far suggests the journey will be painful, polluting and seriously expensive.

Earlier this year, the Commerce Department imposed steep duties on importers of Chinese solar panels made from certain components in a valiant effort to protect US manufacturers… based in Germany.

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Friday, Commerce doubled down and announced even more import duties on silicon photovoltaic products- including cells, modules, laminates and/or panels – that might be used in production of solar power from China and Taiwan.

Commerce initially determined that crystalline silicon photovoltaic products from China and Taiwan have been sold in the US at dumping margins ranging from 26.33 to 58.87 percent, and 27.59 to 44.18 percent, respectively. China’s Trina Solar faces total import duties of nearly 30 percent and Suntech Power nearly 50 percent as a result of the decision. Taiwanese producers face anti-dumping duties of up to 44.18 percent, with the highest rate applying to Motech Industries “Dumping” occurs when commerce determines that a foreign company has received state subsidies to sell its products at a lower rate there.

Yet these decisions are really just a small part of a long trade dispute between the Chinese solar panel manufacturers and SolarWorld Industries America, the Portland, Ore.-based subsidiary of German parent company, SolarWorld AG based in Bonn. SolarWorld is making the complaints and our regulators are valiantly protecting Germany’s right to do business here. They are World Cup Champions, after all.

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An improvement in growth for the European Union and a renewed willingness to buy government debt in the distressed periphery has us clapping our hands in admiration at the turnaround the region has achieved in just the last 12 to 18 months.

The rot was stopped in the summer of 2012 around the time of EU President of the European Central Bank Mario Draghi’s statement that the bank would do whatever it took to keep the euro together and fund those states that were all but closed off to international credit marks at anything like a sustainable borrowing rate.

But according to an FT article, even the International Monetary Fund does not believe Europe is out the woods and, put simply, is just one negative shock away from outright deflation.

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What exactly is the problem?

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Read the first part of this post here

Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy already has the lowest unemployment rate in Europe.

The villain here is not Germany, but the Euro. Arguably, if Germany left the Euro, one could see some immediate corrective swings occurring. Germany’s new currency would rise dramatically against the “new” Euro, and the remaining Euro countries would benefit from a massive devaluation in their currency, boosting competitiveness.

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Unfortunately, there would be no one to fund the hundreds of billions of dodgy loans and outright debt the area is saddled with. Because what is oft overlooked is the fact that Germany has been the largest contributor to the European Stability Fund and the European Central Bank. German guarantees supporting the existing bailout fund amount to €211 billion ($285 billion). The ESM will require a capital contribution from Germany. If the ESM lends its full commitment of €500 billion ($675 billion) and the recipients default, Germany’s liability could be as high as €280 billion ($378 billion).

As the FT points out, the size of these exposures is huge in relation to Germany’s GDP of around €2.5 trillion, and German household assets estimated at €4.7 trillion. Nor is Germany without its own problems. It has substantial levels of its own debt (over 80% of GDP), an ageing population, and deteriorating dependency ratios, to compound its problems.

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No wonder Germany suggested taking over the running of the Greek economy early in 2012. They wanted to be sure a major default didn’t start a domino effect that would end at Germany’s doorstep.

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Some American business folk look at Germany’s industrial policy with a little envy. Germany, it seems, is willing to do just about anything to support its manufacturing industries and the benefits are plain to see. With a vibrant manufacturing sector exporting around the world, it doesn’t get any better than brand Germany when it comes to machine tools, manufacturing equipment, automotive technology, and much else.

At the same time Germany is often looked upon as one of the good guys, respecting intellectual property and international law, while leading Europe out of its mess of debt and incontinent tax collection with fiscal responsibility. But not all would agree.

Paul Krugman, the influential Professor of Economics and International Affairs at Princeton University, is well known for his liberal views on trade and international economics. His view of Germany is somewhat different from the above, as he recent opined in a NY Times article.

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In Krugman’s view, Germany has taken the place of China as the current account running bogeyman of the world economy. For one, Germany has overtaken China as the running the world’s largest current account surplus; both in absolute terms and in terms of a share of GDP, it is twice China’s. That alone Krugman views as bad enough. One country’s surplus is another’s deficit, he says, and he notes that Germany has been running a surplus for a decade, but earlier these were offset by equally massive deficits in many European countries.

Europe as a whole ran a small surplus with the rest of the world. Germany remains dependent on its neighbors, with 69% of total exports going to European countries, including 57% to the member states of the European Union. Of course, not all neighbors are equal. In 2012, Germany ran a trade deficit of €27 billion ($36 billion) with Russia, Libya, and Norway, mainly for energy imports.

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This is the second in a two-part series. The first part can be found here.

The IHS research quoted on 24/ reckons that high energy prices will cost the German economy 40,000 jobs in the chemicals sector by 2030 under one pricing scenario, while machinery and motor vehicle manufacturing could lose 85,000 and 87,000 jobs. Not only do solar and wind raise costs, they also reduce stability. The rising and setting of the sun can be predicted to seconds, but the intensity of light and KWhrs of power are less reliable. Wind is even worse, leaving generating capacity idle during peak demand one day but contributing the next. Under such circumstances, most countries ensure a base load of supply by maintaining low-cost always-on power sources such as nuclear or coal.

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The drive to renewables in Germany should run counter to maintaining a high dependency on coal, but (and some may say hypocritically) Germany has five new coal-fired power plants with a combined capacity of around 4 GW going through their “first fire” trials this summer. Although generators are at pains to stress how very efficient these new plants are, much of Germany’s coal-fired power production uses lignite, the dirtiest form of coal. Overall, Germany’s coal-fired power plants (including lignite) contributed more than 50% to the nation’s electricity demand in the first half of this year, with more coal-fired capacity likely to be commissioned before the first nuclear plant is taken out of service in 2015, Platts tells us.

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Germany has long been admired for its economic achievements. At our Commodity/PROcurement Edge conference last week, Nucor, one of our sponsors, spoke of Germany’s industrial success as being built on its model of long-term investment. Regardless of which party led the government, Germany maintained a focus on manufacturing and technological development as a long-term goal for its economy, a position not followed by its partners in the European Union, despite what they may say.

That focus has kept Germany as the second most successful exporter in the world, with an account balance of $208,100,000,000 in 2012– which is just a whisker behind China’s $213,800,000,000, according to the CIA Data Book. Germany is a world leader certainly in technological sophistication and quality, along with machine tools, automotive, chemicals, steel, and machinery. Its economy is the fifth largest in the world and by far the largest in the EU. And Germany has achieved this while having the lowest unemployment and highest standard of living of any major EU country, with the former at 6.5%.

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The German model has arguably been sustained in recent years by the formation of the single currency. If instead of the Euro, Germany still maintained the Deutschmark, the resulting strength of the mark would be causing immense problems for Germany’s export-led manufacturing economy, in much the same way as it is for Switzerland now and had been for Japan before they embarked on QE and currency depreciation. But these speculations miss the point, as Germany is part of the European Union, and if at times they seem reluctant to support their fellow members– whom their success in part depends on– who can blame them for not wanting to take on the rest of Europe’s debts? Read more

Continued from Part One.

According to the Telegraph, over 100 German ship funds have already shut down as the crisis in global container shipping comes to a head, while 800 more funds are threatened with insolvency, according to consultants TPW in Hamburg.

In the UK, Britain’s oldest ship-owner, Stephenson Clark, dating back to 1730, went into liquidation this month, closing the final chapter of Britain’s coal trade and the industrial revolution, citing “incredibly depressed” vessel rates. Like large parts of the German container industry, the firm over-invested in the boom four years ago, betting too much on Asian growth rates.

Germany, however, is said to be the superpower of container shipping, controlling almost 40 percent of the world market; so if collectively they get it wrong, it goes wrong in a big way.

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