Aurelia Butler

Last Thursday, the UK government unveiled a £15bn-plus policy package to address energy prices, big enough to redistribute close to one per cent of national output. That a Tory chancellor, Rishi Sunak, should preside over such massive redistribution and market interference illustrates the scale of the challenge faced by most European governments today.Addressing the cost of living crisis is their most acute political imperative. It is tempting to do so with short-term solutions. But this risks aggravating even greater medium-term challenges: the carbon transition and the need to resist Russian President Vladimir Putin’s designs on the balance of power in Europe. Both require fundamental reform of our energy systems, not financial sticking plasters.Sticking plasters are needed too, of course. The rise in energy prices in Europe has been breathtaking. Prices for natural gas have grown five to tenfold higher than normal since last autumn, when Putin began to tighten supplies. Electricity has followed suit, because gas-fired power plants often provide the balance of fluctuating energy demand in Europe’s power markets. Global oil prices are double their 2019 levels. Such price movements are politically potent because they entail two significant economic redistributions. One international, from energy importers to exporters; the other within countries — even within energy exporters such as Norway — from consumers to producers of energy. Since energy takes a larger bite out of the budgets of those on lower incomes, this is regressive — and is made worse as energy costs push up the price of everything else.Together this makes for a dire predicament. Most countries face a hit to their real incomes just when it becomes indispensable to help those of their citizens who can least bear greater hardship. So what principles should guide their policies?Governments have, roughly, four ways of mitigating higher energy costs. First, they can directly cap prices. Second, they could reduce or eliminate any taxes on energy purchases. Third, they might leave prices untouched, but directly compensate groups of people for the higher costs. Fourth, they could leave prices themselves untouched, but change the market structures through which they are set — in particular so that consumers can benefit from renewable electricity’s low marginal generation cost. For example, in the EU there is a push to make electricity pricing less linked to the marginal cost of generation, which at the moment means the cost of using gas in thermal power plants. Another example is to strengthen incentives for buyers and sellers of energy to enter into long-term contracts with more stable prices. What most distinguishes these approaches is whether they work with or against the market, and as a consequence align with or frustrate the longer-term interests of the governments that adopt them.The first two, by trying to push prices below their true marginal costs, encourage consumers to use more of the energy sources whose relative scarcity is responsible for driving prices so high: gas for heating and electricity, oil for non-electrified transport. Price caps on energy prices, such as the UK’s one on what households pay, and reduction in taxes such as fuel duty, are guilty of this flaw. Trying to blunt fundamental relative price signals in order to lower average price inflation is bound to store up problems for the future. It increases demand for fossil energy — and by extension for energy sold by Russia — and reduces the incentive to invest in renewables.The third and fourth approaches are therefore preferable. By allowing marginal prices for the energy source getting us into trouble to rise as high as necessary, they protect the incentive to economise or shift into substitutes. Direct financial support is easy to design and can be targeted at those in greatest need. Structural reform of energy markets is harder and may have to include elements of implicit rationing.But most importantly, compensating measures must be matched with plans to change how we generate and consume energy: big and rapid rollout of low-marginal cost renewables and much greater capacity in storage to allow people to shift away from spiking costs.How does the UK’s current set of policies measure up? The good: new direct support announced this week. The bad: retaining ill-designed price controls. And the ugly: far too little in the way of investment in a smarter energy system. As a sticking plaster, it does the job. It fails badly as a sustainable solution to our [email protected] More

Will eurozone inflation accelerate to a new high?Eurozone inflation has been rising for 10 consecutive months and most economists think it has further to go. Annual consumer price growth is expected to have accelerated in May, hitting its highest point since the single currency’s creation in 1999.The fallout from Russia’s invasion of Ukraine has sent energy and commodity prices surging upward and added to global supply chain disruption, while the lifting of Covid-19 restrictions has boosted demand across Europe. All this has pushed inflation higher.Economists polled by Reuters on average forecast the eurozone’s harmonised index of consumer prices would increase 7.7 per cent in the year to May, when these figures are published by Eurostat on Tuesday. That would be up from April’s record of 7.4 per cent.The surge in inflation, which is expected to hit a new 40-year high in Germany of 8 per cent, as well as rising in France, Spain and Italy when national data are released on Monday and Tuesday, has prompted policymakers to promise an imminent response.Christine Lagarde, president of the European Central Bank, said last week it was on track to raise its deposit rate from minus 0.5 per cent to at least zero by September after an “unprecedented combination of shocks” drove inflation far above its 2 per cent target.Goldman Sachs economists recently predicted the ECB would raise rates by a quarter percentage point at each of its eight policy meetings between July and next June, which would lift its deposit rate to 1.5 per cent. “While a sharper slowdown in growth or persistent sovereign stresses could lead to slower policy normalisation, clearer signs of more sizeable inflationary effects could require a faster exit,” they said. Martin ArnoldCould a strong jobs report reignite pressure on the Fed to aggressively raise interest rates? Signs of weakness in US economic data published this week have pushed investors to lower their expectations of how high the Federal Reserve will raise interest rates this year. But another hot employment report could quickly undo that move. The labour department is expected to report on Friday that the US economy added 318,000 jobs in May, a slight slowdown from 428,000 the previous month, according to a FactSet poll of economists. Meanwhile, the unemployment rate is expected to have fallen to its lowest point since February of 2020. What’s more, employment forecasts for three of the previous four months have been well below the reported number.Evidence that there continues to be upwards pressure on wages could reignite inflation fears that had just begun to cool: market measures of inflation have in recent weeks fallen, and the growth in consumer prices in April slowed. A strong report could also help reassure the Fed that the US economy is strong enough to withstand further aggressive rate increases. Bets on where the Fed’s key interest rate would be by December 2022 fell from 2.8 per cent to 2.6 per cent this week after the census bureau’s report that new home sales fell by nearly 17 per cent in April, and the S&P purchasing managers’ index data showing a slowdown in the rate of growth in business activity. The Fed’s main interest rate is currently set at a range of 0.75 per cent to 1 per cent. Kate DuguidHow much are rebalancing flows lifting global stocks? The broad FTSE All World share index was down 7 per cent for May at its worst point this month, as fears about economic growth swirled across global trading desks. A big rally at the end of last week essentially wiped out those losses. Upbeat earnings released at midweek from big US retailers like Macy’s, Dollar Tree and Dollar General helped ease concerns that US consumers, a linchpin of the world’s biggest economy, are putting away their wallets in light of fiery price growth. On Friday, a report showing US consumer spending rose more than expected in April helped bolster that argument. It is a nice narrative, but at the same time, there may also be technical factors driving the recent gains in global stocks. The big fall in equities earlier this month meant that funds that target particular allocations to their portfolios — like 60 per cent equity, 40 per cent bond funds — were thrown out of kilter. That means managers would have had to buy-up equities towards the end of this month to rebalance their portfolios. JPMorgan analyst Nikolaos Panigirtzoglou noted earlier in May that the subject of “rebalancing” has been a topic of conversation recently with clients. “Given that a significant portion of the decline happened in May, we expect to see significant flows by both monthly rebalancing funds towards the end of this month and by quarterly rebalancing funds towards the end of the quarter,” he noted. The bank estimates that balanced mutual funds will have bought $34bn to $56bn in equities before the month ends on Tuesday. US corporate share buyback activity has also been “elevated” in recent weeks, according to the bank, while senior executives appear to be taking advantage of the dip to buy their own company stock. Adam Samson More

Baltic politicians have lashed out at French and German leaders for discussing with Russian president Vladimir Putin how to unblock Ukrainian ports, highlighting the diverging views among western allies over how to handle diplomacy with Moscow.Leaders in eastern Europe have grown uneasy about the willingness of their western European counterparts to talk with Putin, reigniting suspicion that some EU countries are pushing Kyiv to cede territory to end the war.“It is incredible how the leaders of France and Germany are inadvertently paving the way for new acts of violence by Russia . . . How is it possible neither Paris nor Berlin have learned from history? Why is it presumed that Putin, currently waging a war on a major European people, intends to keep any promise?” asked Marko Mihkelson, head of the Estonian parliament’s foreign affairs committee.Artis Pabriks, Latvia’s deputy prime minister, said on Twitter: “It seems that there are number of so-called Western leaders who possess explicit need for self-humiliation in combination with total detachment from political reality.”German chancellor Olaf Scholz and French president Emmanuel Macron held a 80-minute phone call with Putin on Saturday in which the Russian president told them Moscow was willing to find ways to unblock grain exports from Ukraine’s Black Sea ports and could increase its own fertiliser and agriculture exports if relevant sanctions are lifted.It came two days after Italian prime minister Mario Draghi also discussed the issue with Putin in an attempt to ease a global food crisis that threatens developing countries in particular.There is a growing rift between many eastern European countries and the likes of Germany and France over the wisdom of speaking to Putin as the war enters into its fourth month. The Baltic countries believe such phone calls merely empower Putin, and that instead Europe should send more weapons to Ukraine.In the past three days, hundreds of ordinary Lithuanians crowdfunded €5mn to buy a Turkish military drone for Ukraine, according to the internet broadcaster Laisves TV, which started the fundraising.Mihkelson, invoking a phrase that Macron previously used to describe Nato, asked if the French and German leaders were not “being brain-dead” in their actions.He added: “Macron and Scholz should hang up the phone and book a trip to Ukraine post haste. I hope their peculiar actions are not motivated by fear of losing influence in democratic Europe which Ukraine would surely enter after winning the war.”Gabrielius Landsbergis, Lithuania’s foreign minister, said on Sunday that Russia “must be isolated” as countries around the world including India, Australia, Japan, South Korea and “little Taiwan” were watching what happened in Ukraine with anxiety. “Giving the occupier a chance to occupy territory means that it can be repeated elsewhere,” he added.Putin, Scholz and Macron discussed whether a negotiated solution could be found to open Odesa to allow grain exports to leave Ukraine, according to an Elysée briefing after the call. The French and German leaders “noted the Russian president’s promise to allow ships to access the port to export grain without it being used militarily by Russia — if the port was demined in advance”, according to the briefing.Some western capitals fear the looming food crisis and its devastating impact on poor households in Africa and the Middle East could trigger a new wave of migration to Europe.Kristi Raik, head of the Estonian Foreign Policy Institute, said that the French and German leaders risked giving legitimacy to “Putin’s lies and unacceptable demands”. She added: “I don’t share the view that no Western leader should ever talk to Putin. But the way Macron and Scholz are doing it is not just unhelpful, it is deeply counterproductive.” More

“A halt of gas imports from Russia could have a very strong effect on the already weakened Italian economy,” Confindustria said, adding the negative consequences would come from a major shortage of gas volumes for industry and services and an additional increase in energy costs.Last year Russia was Italy’s biggest supplier of natural gas, providing 29 billion cubic metres or 40% of total gas imported by the country. Following Russia’s invasion of Ukraine, the Italian government has been seeking alternative energy suppliers and its ministers have travelled to Africa and the Middle East to secure new contracts.As part of this effort, Italy’s energy group Eni and Algeria’s Sonatrach on Thursday signed a deal to accelerate the development of gas fields in Algeria and of green hydrogen.This move is expected to boost the North African country’s gas exports to Italy by some 3 billion cubic meters (bcm) per year. More

The energy-rich Gulf emirate plans to start licensing financial technology companies soon, he added. Fitch Ratings in April forecast Qatar’s GDP would grow 3.2% in 2022, from 1.6% in 2021, reflecting increased output from the soccer World Cup that the country is hosting in November and December and the post-pandemic recovery. More