Energy, Inflation, War – how bad could it get? | DW News

0:00 inflation, recession,

0:01 energy shock, a very large shock for the European economy,

0:05 a very bad piece of news for Europe.

0:07 The European economy is in a pretty bad state,

0:09 and now comes the next energy shock on top of the previous one.

0:12 Today, we're going to talk about recession.

0:14 Are we already in one?

0:15 Is one coming?

0:16 Europe remains uniquely vulnerable to any potential recessionary situation,

0:22 especially if what we're thinking is coming is actually a perfect storm.

0:26 For one, European economies are more exposed

0:29 to energy prices than say the US or China.

0:31 And European governments have been trying to stave

0:34 off the big bad inflation for a while,

0:37 but we've kind of moved into this stagflation era.

0:40 Well, right now the economy in the US where I'm sitting is booming

0:46 essentially because of the AI investment boom

0:50 and the AI implications for the rest

0:53 of the economy and because of a very expansionary fiscal policy that government

0:59 is expanding its its spending in the middle of um of a boom.

1:05 So it's kind of like adding fire to the fire

1:09 and those things are keeping the economy on a on on a stronghold.

1:14 Both are kind of missing an action in Europe that on the one

1:19 hand you have um less of dynamism associated directly with AI investments.

1:25 There might be some dynamism associated with AI absorption,

1:30 adoption, adaptation, diffusion, and that might help the economy.

1:35 But the energy shock is a very large shock for the European economy.

1:40 the the economist today is coming out with a report

1:44 with no a headline saying you have yet to see more because

1:50 the energy situation is much more fragile than the markets think

1:55 and so that's a very bad piece of news for Europe

2:00 very bad news for you um grammar what kind

2:02 of vibes are you getting from the European side

2:07 yeah I mean the European economy is indeed in in a pretty bad state.

2:11 Um I mean we um uh have the since the since the Russian invasion into Ukraine,

2:18 we have significant energy price shock and energy scarcity

2:22 shock that was largely uh resolved um in the last

2:27 in the last year and now comes the next

2:29 energy shock um on top of the previous one.

2:32 So, so the combination of these two successive energy shocks is

2:37 a burden on the relatively energyintensive

2:40 um industry in particular in countries

2:43 like like Germany which are very sort of industry um cheap

2:47 industry cheap energy based industry um for for a very long time.

2:51 And so um part of the story we we are observing is

2:55 actually a transformation of of an economy

2:58 away from a relatively heavy industry,

3:02 relatively uh energy intensive industry towards a different

3:06 type of industry and the they are there are basically these two um obstacles um

3:13 that the German and the European industry face.

3:17 One is a major China shock.

3:19 China really roaring ahead on ma major technologies that are now at the core

3:25 of what typically um the the European econom econom industry was was able to do

3:33 um and on the at the same time the artificial intellig intelligence shock

3:38 I want to get into some of the headlines

3:40 as well because that's playing into the broader story

3:43 here right so Gundam at the time of recording

3:46 there was a brief uh hit for Brent crude oil

3:50 prices over $120 a barrel and in the last

3:54 two months it's been really a roller coaster for oil

3:56 prices and then we had the exit at the beginning of May uh of the UAE from OPEC.

4:03 How high could oil prices get?

4:09 Well, the the main uh question for that the main answer to that is

4:14 it depends on um how long the straight of Hormus will be will be closed.

4:18 I mean we are at the moment in a situation that for um

4:22 two months now almost two months um the straight of Homos

4:25 has been has been closed and that means roughly 20% of the global

4:29 oil supply does not reach um the final customers and um

4:35 that of course means that prices go up go up go up

4:39 um and um prices have had the roller coaster because um expectations about

4:44 how long it would be closed uh changed uh depending on various

4:49 tweets and statements by both the Iranians as well as the US president.

4:54 And so I think at this point um the uncertainty um has again gone up.

4:59 That's why oil prices have gone up

5:01 and and I think the uh many market participants

5:04 now worry that this might might remain uh

5:07 uh closed for for longer than than foreseen.

5:10 And so so I think the for me the really the question is what can we do about it?

5:14 Um, and I think unless you you think there's a military solution to it,

5:18 which I don't think even the US government thinks is feasible,

5:22 um, there we will have to find some sort of a compromise.

5:26 Um, and that's very unhappy.

5:28 I'm saying this very unhappily because we don't

5:30 want to make a deal with this Iranian regime.

5:33 But then I prefer to do an ugly deal with the Iranian regime

5:37 rather than uh keep having very high oil prices that benefit just Russia.

5:42 So let's say you know we have a peace deal, we have an agreement of some sort.

5:46 How how long would it take the straight offes open again?

5:49 How long would it take to you know prices going back to normal?

5:52 Is that like a couple of months situation or does that happen quicker?

5:58 I would say that depends on on two things.

6:01 One is the damage already done to the infrastructure.

6:05 There apparently two trains of uh LNG and Qatar that were

6:10 destroyed and will take between three and five years to repair.

6:15 It depends on what's happening to the oil

6:18 capacity because now that the inventories

6:21 are all full and they don't have where to put the oil,

6:24 they have to start shutting down wells.

6:26 And when you shut down wells, you damage wells.

6:29 You you lower the pressure on the wells.

6:31 And so uh putting them back into production may

6:35 take some time and you need some equipment and some

6:39 countries maybe Saudi and UAE are more prepared

6:43 for that because they've been shutting and opening as OPEC members.

6:49 Iraq probably less so and Iran probably less so.

6:53 So the idea is that you know even if you opened it tomorrow you know if

6:58 you opened it tomorrow it's not obvious that all

7:00 all the insurance companies and all the chip

7:04 companies are going to immediately say okay go

7:07 ahead use it because they'll want others to test

7:09 it first and then we'll find out how much how much damage has has been done.

7:15 So I think that we're playing a game of chicken.

7:19 The Iranians are trying to survive.

7:22 So they're fighting for regime survival.

7:26 Trump is fighting for you know the next

7:29 November elections which are not existential for him

7:32 etc.

7:33 So the question is who chickens out first?

7:36 And you know some people would say that you know when you

7:40 have a a pre predator prey dynamic one is running for their lives

7:46 and the other one is running for their lunch and that that means

7:50 that one has more higher toleration for pain than the other.

7:54 But we shall see.

7:55 You know, I can't help but think

7:57 about when we're thinking about this energy shock,

8:00 the last energy shock we had here in Europe, right?

8:03 And it all has to do with fossil fuels.

8:06 Uh, Gundam, why aren't governments doing everything

8:10 in their power to ramp up renewables?

8:13 Because, you know, the sun doesn't always shine,

8:15 but it shines everywhere, right?

8:16 You're then not dependent on on a on a pipeline or something like that.

8:24 Well, I mean I think the first answer is

8:27 uh many countries have invested a lot in renewables

8:30 and among them China certainly stands out as the country

8:34 that has really really invested very strongly in renewables also

8:40 um because it realizes that um it is dependent

8:44 on um the fossil fuel from geopolitically difficult actors and so

8:50 so China has really prioritized energy security based on renewables

8:56 plus coal and nuclear and coal is domestically produced.

8:59 Um now this is uh a situation that we have not replicated in Europe.

9:06 In Europe the dependence on fossil fuels is still very big.

9:11 Um at the same time there has been an attempt to um increase and build um

9:17 the renewables infrastructure but um it has basically

9:21 happened too slowly uh to really compensate for that.

9:25 But there actually significant differences across European countries.

9:29 If you look for example at Spain,

9:31 Spain has a much higher share of renewables in the electricity grid than than

9:37 Germany does and um has so far weathered this shock um uh this fossil

9:43 fuel shock much better than Germany in the sense that um electricity prices

9:48 have increased much less in Spain than they have on average in in Germany.

9:52 And so in that sense um I would say yes the structural long-term answer is

9:58 um a sensible and reasonable buildup of renewable

10:01 energy and the entire energy systems behind it.

10:06 Rick oil has also been the talks about the recession but we've also had I live

10:11 through like a couple recessions now like 2008

10:14 even I I'm young but I I've experienced recessions

10:16 a lot of historical events in both of our lives.

10:18 So uh like 2008 of course like COVID hit that was that was a big hit.

10:23 Um what are usually like the shock

10:26 absorbers for stuff like this for a recession?

10:29 What can states or you know European Union do

10:32 to have like a safety net against a recession happening?

10:38 Well I mean the typical thing is that governments just

10:41 uh stimulate the economy through

10:43 fiscal spending through lowering interest rates.

10:47 The complication here is that it's happening

10:49 in the context of what economists call a supply shock.

10:53 It's some of the inputs are in shorter supply and higher price.

10:56 So that tends to generate inflation.

10:59 And there's a bigger tradeoff between

11:01 containing inflation and stimulating the economy.

11:05 But you know there's this old line saying don't let a good crisis go to waste.

11:09 And I think that that um Europe has

11:14 an important serious strategic situation to deal with.

11:19 I wish it wasn't the case, but it is what it is.

11:23 I think Europe has to think that the security umbrella,

11:27 the US security umbrella is not as solid, as trustworthy as as it thought.

11:35 that that security umbrella was built into many of the European institutions.

11:41 For example, in the European Union,

11:44 the Akoair the European common law or or shared law says that security is

11:53 the responsibility of the ind of of the states of each 27 of the members.

11:59 And you know if you were to design the European Union from scratch,

12:05 you know, it would be a military union.

12:08 But right now you have you know 27 armies,

12:11 27 procurement processes, 27 everything.

12:14 And um you know Germany is now

12:20 independently you know accelerating its its buildup.

12:24 Poland is you know strong in its buildup etc.

12:28 each one with its own kind of separate army that makes it in part

12:33 of the investments are there to substitute for the US not to complement the US.

12:37 So it's not making the old NATO alliance necessarily stronger.

12:41 It's just you know you're replicating capabilities that the US already had.

12:47 So if you see that it means that you know it will

12:50 take Germany maybe 10 years to become a really strong military power.

12:55 If you're sitting in Moscow, you say,

12:57 "Should I wait 10 years to take the Baltics or should I take them now?" So,

13:03 I think that Europe is in a very serious strategic situation.

13:07 So, maybe if you need to have some

13:09 fiscal space to do more to stimulate the economy,

13:13 you know, you might use that space to consolidate the security of Europe, right?

13:18 And to advance a little bit in the union.

13:20 We were talking about Winram was talking before about the fact

13:24 that in Spain they use more renewable energy than in Germany

13:30 and and Germany could buy energy from Spain but they have

13:34 to get through France and France doesn't open up its electricity market.

13:38 So it's again a problem of not of insufficient

13:42 integration within Europe that maybe we can use

13:45 this crisis to make progress in making Europe a more

13:49 viable and more sustainable and more vibrant vibrant place.

13:52 I was really happy to see uh Ricardo that you are

13:56 a true European federalist just as I am and and really

14:00 and really arguing the case for um a European army

14:04 which by the way at the foundation of the European

14:07 Union um was uh a big part of the conversation

14:11 and was stopped in the end in the in the French

14:13 Parliament and Conrad Adnau at the time was saying

14:16 this is the bad the worst day of my political life.

14:19 um because he realized that this is of course a huge huge

14:23 blow to European integration and exactly that's the kind of thing we need.

14:28 I want to bring in a comment that we actually got recently from one

14:32 of our faithful listeners page and this was

14:35 received at uh via email at the dipdw.com.

14:39 She had a lot of really good things to say,

14:40 but I want to bring part of this specifically to you, Kai.

14:43 And she wrote um because this was about our story about how the US

14:46 and Germany specifically compare in terms of technology

14:50 and innovation and that kind of a thing.

14:52 And she wrote, "Instead of trying to copy and paste the US economic model,

14:56 I would argue Germany should take lessons on the US business culture

14:59 that makes the market so successful instead

15:02 of creating products like the European Zoom, as discussed on your podcast.

15:06 In these times of economic uncertainty,

15:08 which we've discussed a lot in this episode,

15:10 German businesses should shift more towards a hiring and promotional

15:13 model that rewards new ideas in order to encourage innovation.

15:17 Yeah, I guess Germany's always a bit slower to move in general, I say.

15:22 But I guess if you would like tell

15:24 anybody from Zmen's also show them this comment, they'll be, "Yeah, that's us.

15:27 That's we we're doing this.

15:29 We're innovative.

15:30 We're flexible.

15:31 We're investing.

15:32 We're doing all of these things." Um, yeah.

15:36 It's I mean it's really for me it's really tough

15:37 to say because I always also feel like that companies here

15:41 struggle a lot and do a lot and try to work

15:43 with the you know political frameworks that they are given

15:46 and they just need to accustomed to so many norms

15:48 that Germans like but you know so that's also something that we

15:53 maybe as Germany could cut down a bit not just you

15:55 know our business mindset but the red tape around it basically

15:59 I think that like that was such a cultural shock to me coming here because I

16:02 think coming from the US right there was

16:04 this idea that like Germany like really has its

16:07 like you know beep together right that things

16:10 like run on time and that a German product

16:12 like has like a certain standard that it that levels up to but then just you get

16:16 here and just really basic parts of living

16:19 much less when you're running multi-million multi-billion dollar companies

16:23 like the hoops you have to jump through

16:25 sometimes can be really wild I have to say

16:27 as someone who who has come here recently

16:30 so these companies these big companies they really

16:34 do they they They they turn the ship

16:36 ship quite slowly when it comes to addressing innovation,

16:39 at least from my vantage point.

16:41 Yeah, totally agree.

16:42 Totally.

16:44 Hi YouTube.

16:44 This has been a sneak preview of our podcast, The Div.

16:47 And if you like what you saw,

16:48 you can of course check out more episodes in our playlist

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16:59 But until next time, thanks so much for checking out the dip.