As Europe Faces Oblivion, Markets Debate Technocratic Tinkering

Inflation likely rose more than 9% across the euro-area in August, data out Wednesday showed.

The preliminary read on price growth was accompanied by the usual mainstream media images: A full shopping cart abandoned in the middle of a grocery aisle, three women walking by crates of fresh produce enveloped in shadows and various other photographic slices of life.

At 9.1%, the flash estimate from Eurostat suggested annual inflation in Europe was the highest ever this month (figure below).

Core prices, which exclude energy, food and tobacco, rose 4.3%.

Energy prices were more than 38% higher from last year, which, in a testament to the scope of Europe’s crisis, was the slowest pace since April. Food prices rose double-digits.

Increasingly, spiraling inflation in Europe feels like a “sum of all fears” scenario. It’s a reflection of a proxy war with Vladimir Putin’s Russia, exacerbated by climate change brought on by a fossil fuel addiction humanity should’ve kicked decades ago.

The overlapping ironies are almost too much to bear. For example, Germany’s comically tragic efforts to bridge the temporal gap between now and a cleaner future entailed, among other things, shipping coal, the dirtiest of dirty fuels, up a waterway which, in places, was too shallow to facilitate transport thanks to the very same climate change the country is trying to combat. According to a recent assessment, Europe’s drought is the worst in 500 years.

At some point, policy failures have consequences. Decades of procrastination vis-à-vis clean energy is now manifesting in an acute crisis which, inconveniently for rich Westerners who’d much rather pretend that such things only happen in locales that “don’t matter,” threatens to make life very uncomfortable for much of the developed world. Decades of placating a kleptocratic autocrat on the excuse that appeasement was necessary for “energy security” is now manifesting in energy insecurity because, as it turns out, entrusting one’s energy needs to a KGB agent is suboptimal. Who knew? Countenancing the annexation of territory adjacent to crucial ports and vast grain crops on the (tacit) excuse that not countenancing it entailed confronting a nuclear-armed aggressor for little in the way of immediate gain, opened the door to a food crisis eight years later. And so on.

It’s far too late for good solutions. Instead, Europe has only bad ones. Like price caps and what’s almost sure to be a clumsy plan to “de-link” natural gas prices from power costs. Here’s a (retroactive) suggestion: If Europe wanted to “de-link” those two things, they could’ve moved away from natural gas over time instead of embracing it. Had that been a top priority yesterday, Europe wouldn’t be beholden to the fuel and thereby subject to the increasingly delusional whims of the aging autocrat who controls it, today.

“Global supply-side pressures have been easing in recent months,” ING’s Bert Colijn wrote Wednesday, noting falling commodity prices and moderation in transportation costs. Still, he said, “specific European problems continue to push inflation higher.” He mentioned “the gas supply crisis” and ongoing droughts.

“The question now is whether the data are enough to nudge the ECB toward the 75bps increase that some on its 25-strong Governing Council want debated,” Bloomberg mused, in their coverage. That is indeed “the question,” although it shouldn’t be. The question(s) should be how Europe is going to fix the problems mentioned above, in order to ensure that going forward, people aren’t at risk of freezing, starving or (forgive my candor) being called up to defend their borders from an advancing Russian army.

Have a look at the simple figure (below). It’s just the ECB’s policy rate with headline CPI.

To channel one famous politician whose aloof arrogance, sense of entitlement and generalized failure to close the deal, is in part responsible for the Western world’s current predicament: “What difference, at this point, does it make?”

The depo rate is 0%. Inflation is 9.1%. Raising rates 50bps or 75bps or even 500bps this month isn’t going to make a shred of difference on the inflation front in Europe.

In addition to the fact that the drivers of inflation are beyond the ECB’s capacity to control, there’s scant evidence of a wage-price spiral, demand is sure to collapse as the region careens into recession and the monetary policy transmission channel is notoriously unreliable.

“As the economy is slowing rapidly — and perhaps already contracting at this point — the question is how much the ECB needs to slam the brakes,” ING’s Colijn went on to say. “If indeed signs of economic distress become more apparent, and inflation remains highly driven by supply-side factors,” it’s not clear how the ECB would respond going forward following this month’s hike, he added.

Again, I’d submit that it doesn’t matter. Assuming it’s still possible to fix Europe’s problems, the solutions won’t come from the ECB.