Europe’s approaching energy crisis and economic winter
Europe is preparing now to suffer the consequences of the wrongheaded interventionist policies it has followed for more than a decade.
Inflation, an energy crisis, and a perpetual economic stagnation are the expected outcomes of quantitative easing, unnatural negative interest rates, a ban of traditional energy sources without any feasible alternatives, massive debt, enormous government spending, and overtaxation.
All of that occurred long before war troubled European lands. Russian President Vladimir Putin’s aggression in Ukraine simply brought an unsustainable situation out into the open.
Get Our Latest News for FREE
The clearest illustration of the damage government intervention for political purposes has done is in the energy sector.
For years, politicians in the European Union have shut down nuclear power plants (which produce clean, low-cost, and safe energy), closed coal plants, and banned natural-gas exploration, hurting the supply side in the name of so-called green energy.
It’s been this open war on traditional energy sources, without having the renewable alternatives to meet the demand levels, coupled with fiscal repression that has made the EU dependent on Russia and non-ally countries for energy, and that affects national security.
European bureaucrats talk about saving the environment and encouraging electric vehicles. Yet, essential elements for the batteries of those vehicles are produced and processed mainly in China, one of the biggest polluters in the world, in the process increasing dependence on an adversary country.
It’s not exactly clear how the climate is improved by destroying the European economies, which — thanks to capitalistic innovations — have become cleaner, while increasing reliance on China, as the communist country pollutes even more.
On the other hand, it should be noted that the entire EU economic model is based on cheap energy obtained from Russia, and low input costs used to create high-quality products exported to the world. That’s why the trade balance of the EU has been positive until recently.
That model was aided by extremely low interest rates, which had the effect of increasing imbalances and debt. Russia knows the unsustainability of this economic system, further damaged by green policies and the centralization of the means of production, and Moscow is hitting Europe by raising its production costs. It’s this fragile economic model that Putin is exploiting to bring the Continent to its knees.
More importantly, the EU has increased its regulatory and tax burdens, which have limited investments in the energy sector and driven up prices. Between 70% and 75% of the price of electricity in most European countries are taxes and regulatory costs.
The American reader needs to know that the mentality among European bureaucrats is that if something exists in European economies, it needs to be regulated and taxed. Europeans are deeply lacking in economic liberalization and incentives for production and innovation, whereas by contrast, the United States was built and prospered on entrepreneurship and freedom.
My country, Albania, is but one small example of a nation blessed with natural resources but cursed with bad governance. The Balkan country produces electricity using clean hydropower. However, it isn’t energy-independent. In these years of democratic transition, there has been neither a liberalization, nor further diversification, of the energy sector.
There has never been a clear vision and strategy to build the capacity to store the energy produced throughout the year, invest in the transmission network and production, and reduce distribution losses. The latter are defined as the difference between the electrical power that enters the system (electricity produced by power plants that are connected to the grid distributor) and energy that is delivered to customers who are connected to the network.
For families and consumers, the state provides electricity at a fixed price, the equivalent of 8 cents per kilowatt hour. Starting next month, the government said, whoever consumes more than 800 kilowatt hours in a month, will pay 36 cents per kilowatt hour, a considerable increase in a country where the average monthly salary is the equivalent of about $500.
Since Albania does not have the capacity to store what’s produced, it sells energy at a lower price during summer and buys it at a higher price during winter, when demand is increased, even though it has the potential to be energy-independent.
Albania suffers from the very same policies of redistribution, overtaxation, centralization of means of production, and decision-making that are ruining other European economies. For instance, about 60% of the fuel price is taxes, and as a result, Albania has one of the highest fuel prices in Europe, while being one of the poorer economies.
Instead of decreasing the value-added tax on the most basic products, the government hands out money to fight inflation, while spending unnecessarily, shifting capital to its cronies.
Recently, an unconstitutional board has been created by the government that, together with the biggest market participants, sets fuel prices periodically. Based on an analysis by the country’s biggest financial magazine, Albanians paid 2.5 times more for fuel compared with the neighboring countries.
Considering that in recent years the middle class has all but been destroyed, most people can barely make ends meet. (In August, annual food-price inflation was 14%, while the prices of basic products such as bread, milk, eggs, and cheese rose by about 20%.)
Government debt has skyrocketed (more than 80% officially), taxes are high, only a handful of individuals control almost every sector of the economy, and there is little freedom or competition in markets. The rising prices of energy and food ensure a difficult winter for Albania in a small example of where Europe is also headed.
Governments often believe they can adjust consumer behavior to suit certain political ideas. They intervene and distort markets by artificially moving supply and demand to levels not justified by the sentiment of market participants and playing to a small fringe of eco-extremists.
That has deformed the basic fundamentals of the energy and other markets. It may not be too late to reverse course, open the closed coal plants, and invest in nuclear energy, while encouraging natural gas exploration. At the same time, individuals, families, and businesses need to be helped by lowering all taxes on profits, income, and basic products, and by reducing government spending.
The time to act is now. Tomorrow, it might be too late.
Originally published at The Daily Signal.
Nikola Kedhi is a Tirana, Albania-based economic expert and financial consultant, and contributor to various media, such as Fox News, Newsmax, Il Giornale, the Federalist, CapX, the European Conservative, and the American Thinker.
