Germany To Borrow €200 Billion For Energy As Inflation Nears 11%

Markets were handed another stunningly dire German inflation outcome on Thursday.

The harmonized gauge showed consumer prices likely rose 10.9% in September on a YoY basis (figure below), and 2.2% from August.

The 12-month print easily exceeded analysts’ estimates and was the highest reading since the introduction of the euro. Consensus expected a 10.2% gain. The national measure likewise reached double-digits, rising 10% from September of 2021.

Some of September’s CPI surge was due to the expiration of discounted fuel and transportation. Still, Thursday’s data showed the pace of energy price inflation accelerated dramatically this month, to 43.9% from 35.6% in August, while food prices rose almost 19% from last year. “We knew that the September numbers would be the first inflation reading without the dampening effect of the government’s energy relief package over the summer months,” ING’s Carsten Brzeski remarked. “The end of the so-called €9 ticket for public transportation and the end of a gasoline rebate alone would have pushed up inflation, but inflationary pressure is all over the economy.”

The news came as European officials pondered what German Interior Minister Nancy Faeser called “scenarios that were unthinkable until recently.” She was referring to contingency planning following alleged Russian sabotage to the Nord Stream network.

There’s palpable concern that Vladimir Putin may begin to target Europe’s critical infrastructure following a trio of unexplained leaks in the Baltic sea gas links. A fourth leak was subsequently discovered. The German navy was deployed to assist in an ongoing investigation into what Defense Minister Christine Lambrecht called a “disturbing event.”

As discussed here when news of the Nord Stream leaks first made headlines earlier this week, the Kremlin is keen to perpetuate Europe’s economic crisis, and the best way to do that is to generate energy price volatility. High, unpredictable prices force governments to make expensive decisions at a time when public finances are imperiled. Apropos, the Olaf Scholz government on Thursday said it’ll borrow €200 billion to pay for a scheme aimed at capping energy costs.

The new plan amounts to the repurposing of a pandemic fund. It’s not part of the regular budget. Christian Lindner can thus claim (however implausibly) that he’s still committed to the debt brake. Counting the new borrowing, the Scholz administration has thrown almost €300 billion at the energy crisis. “Prices must go down,” Scholz told the media Thursday. “To achieve this, we’re using a big umbrella.”

The decision to rely on an extraordinary financing mechanism was necessitated by the failure of an effort to pass along rising costs to consumers. I’ve said it again and again: Households in advanced, rich economies simply aren’t going to make sacrifices, which means subsidizing consumers at the risk of forestalling demand destruction. It is what it is.

Germany was forced to nationalize energy giant Uniper earlier this month. Funding provided through a bailout agreed over the summer proved insufficient amid August’s Kremlin-engineered spiral in gas and power costs. Producer prices in Germany rose almost 50% last month.

Inflation data for the eurozone is due Friday. Asked if Russia might’ve had something to do with the Nord Stream leaks, Dmitry Peskov called any such suggestions “stupid.”


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One thought on “Germany To Borrow €200 Billion For Energy As Inflation Nears 11%

  1. It seems Germany is approaching things very differently, and more intelligently, than the UK.

    Germany will spend huge sums to blunt the impact of energy prices on households, but will also cut energy usage and impose windfall taxes to partly offset the cost. €300BN is about 7% of GDP, but windfall taxes might trim that to 5% ish.

    Germany seized Gazprom’s storage facilities, filled them to near 90%, leased 4 or 5 floating regas ships for immediate regas capacity, fast-tracked permitting for land based regas facilities, nationalized its main gas utility, restarted coal plants, is keeping two nuclear plants open. And the EU still has the option of decoupling electricity price from gas price.

    Compared to the UK . . .

    “[German] Finance Minister Christian Lindner insisted that the fund would not entail further regular borrowing, saying Germany is “expressly not following Great Britain’s path.”

    The U.K. government recently announced tax cuts funded by borrowing despite plans to spend billions shielding homes and businesses from soaring energy prices, resulting in a sharp fall of the pound this week.”

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