Energy Industry’s Lehman Moment: The Editor-in-Chief’s Weekly Recap

Good morning dear readers,

As I write these lines, I am on my way back from the Handelsblatt Bank Summit in Frankfurt. The summit, at which several hundred of the most important heads of the financial industry meet every year, is not only one of the biggest events of the Handelsblatt. It’s also kind of a leading indicator of thatwhat will move the economy in the coming months.

One thing became very clear: Uncertainty and concerns have not been as great since the financial crisis as they are today. Uncertainty because the balance sheets of the companies and the early warning systems of the banks do not yet show the big crisis. Concern, because many suspect what is to come for the German economy.

On the open stage in Frankfurt, bank CEOs repeatedly invoked the resilience of the German economy. In confidential talks, however, it became clear that this crisis is different from Corona and the financial crisis. Rising energy prices hit the economy hard:

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  • More than 90 percent of German industrial companies according to a recent survey, see “strong” to “existential” challenges.
  • Almost every tenth medium-sized industrial company According to a survey, production in Germany was interrupted or curtailed due to high prices.

But, as became very clear in Frankfurt, it has long since hit the broad middle class of the population: Savings bank president Hartmut Schleweis said at the bank summit that due to the high energy prices, soon more than every second household will no longer be able to cope with their monthly income. The economic researchers at the IfW in Kiel fear that the purchasing power of German households could collapse in this crisis more than ever before in reunified Germany.

Particularly sensitive to the current situation: Many companies are saving on investments in climate-friendly technologies and digitization. So they save on their future.

Handelsblatt Bank Summit 2022

Christian Lindner in conversation with Sebastian Matthes.

(Photo: Marc-Steffen Unger for Handelsblatt)

My conclusion after this week: It is correct that Germany is discussing aid programs. In this situation, the German economy needs a pact for the future, a real growth program, even more urgently than billions in aid. This includes a reduction in corporate taxes as well as a real reduction in bureaucracy – which the traffic light government had promised, but has so far postponed further and further.

You can listen to my conversations from the banking summit with Deutsche Bank CEO Christian Sewing, Federal Minister of Finance Christian Lindner and N26 co-founder Valentin Stalf this week in my podcast Handelsblatt Disrupt.

What else kept us busy this week:

1. The traffic light coalition’s third relief package was one of the dominant topics of the week: it’s difficult for 65 billion euros – here you can read who can expect which relief.

2. It was a difficult week for Robert Habeck: After the sharp debates about the technical errors in the gas levy, the industry is now picking up its nuclear plan: The ministry’s proposal “to send two of the three running plants to the cold reserve at the turn of the year in order to start them up if necessary is technically not feasible and therefore unsuitable to secure the supply contribution of the systems.” A rejection can hardly be formulated more clearly.

3. The historic rate hike by the European Central Bank (ECB) was expected: on Thursday it raised the key interest rate by 0.75 percentage points. It was remarkable how self-critical ECB boss Christine Lagarde admitted mistakes. That’s a new tone after months of the ECB downplaying the risk of inflation. However, that doesn’t change the fact that Lagarde is faced with an almost impossible task: It should ensure monetary stability – and at the same time keep the political project of the common currency together.

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4. Rising gas prices are hitting the industry across all industries. The situation is particularly dramatic for producers of nitrogen fertilizers, who are currently shutting down production in droves. There is already a shortage of around three million tons of fertilizer on the European market. Another field in which our continent is becoming dependent on other regions. And another story about the beginning of deindustrialization. There’s a veritable boom in fertilizer production, you guessed it, in the Gulf States where energy is still cheap.

However, the rising prices also claimed a first, prominent victim this week: The hygienic paper producer Hakle went bankrupt because the company was unable to pass on the rising procurement costs to retailers quickly enough. Normally, producers and suppliers negotiate prices once a year. But since energy prices have been rising, manufacturers have been trying to push through price increases ahead of schedule, which not everyone is able to do. Rewe and Edeka sometimes have to compensate for price increases to prevent Germans from buying even less. The industry is therefore heading for a historic price war.

5. A “Lehman moment” threatens the energy market, it has been said more often in recent weeks. My colleague Catiana Krapp analyzed what that means. Because the challenges for energy traders are not only the lack of gas deliveries. There’s also a trillion-dollar financial problem: Electricity and gas traders transfer huge sums of money back and forth every day.

Specifically, gas suppliers pay a deposit so that the gas buyer can be sure that the promised amount of gas will be delivered. However, if the gas price on the market rises, the buyer’s deposit is no longer sufficient to obtain a replacement in the event of a supply failure. In this case, the seller has to add money or he loses his money. And that puts companies in existential difficulties. And here – in Europe alone – a volume of 1.5 trillion dollars is at stake. Get used to this complicated process. We’ll be hearing more about it in the coming months, I’m afraid.

6. The most important interview of the week my colleague Jens Münchrath led with the Harvard economist Kenneth Rogoff. Rogoff fears the current crisis could become the biggest since the end of World War II. At the same time, he warns of the “surprising weakness of China, the country that has been the driver of globalization for four decades”. On the domestic political situation, Rogoff says: “I would prefer Trump to end up in prison. Yes, he will probably run. But I don’t think he will win. Especially not when the Democrats change their minds and nominate a candidate from the center.”

7. But there is also good news. And these days they revolve around liquefied natural gas (LNG). Economics Minister Robert Habeck intends to set up floating LNG terminals in Germany before the end of the autumn.

And this is where the 13,000-inhabitant municipality of Brunsbüttel near Hamburg comes into play, where the first terminal is to be built. Here we succeed where our country so often fails: a big plan, quick approvals – and little bureaucracy. The example shows that it is possible if only the political will is there.

8. It’s one of the best comeback stories in German business: For years, Telekom’s US subsidiary was the group’s largest construction site. Several generations of managers worked their way through the department. That’s history. According to calculations by our Silicon Valley correspondent Stephan Scheuer, T-Mobile is now the most valuable telecommunications company in the world at 179 billion euros.

9. The breaking news of the Queen’s death has moved people around the world. For many, young and old, Elizabeth II was a constant in an increasingly confusing world. Heads of state came and went, as did numerous crises and disasters. The Queen was always there. That’s why the death of Elizabeth II is a turning point right now. “Britain is in the midst of a historical upheaval and at the same time is internally torn,” comments London correspondent Torsten Riecke. “The country, still caught up in a melancholy nostalgia for imperial greatness, is looking for its new place in the world after Brexit, which half of Britons still oppose.”

A tricky situation, because there are double-digit inflation rates, and the country is facing an imminent, long recession. And it has only been under the leadership of a new prime minister for a few days, who has only fallen out with other nations and is more likely to increase the problems than solve them with her economic policy.

I wish you a relaxing weekend.

sincerely

Her

Sebastian Mathes

Editor-in-Chief of the Handelsblatt

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