Europe Competitiveness at an Historic Crossroad?

The energy crisis and three key “deadlines” to watch out carefully… 

There are “3 deadlines” to monitor carefully for the current energy crisis. And the most important one might not be the most immediate one…

Today’s energy crisis debate is largely focused on the current winter – that is the first deadline. With the heating season started two weeks ago, most of preoccupations are if we will have enough energy – mainly gas – for this winter. Storages full around 90% might ensure a relatively well-supplied winter, of course provided that there will not be surprises from other exporters and “captain winter” will be not as severe as it has been sometimes in the past.

The second deadline has (finally) emerged over the last few days and it is about 12 months ahead: the 2023/2024 winter. The concerns are more than legitimate as maths is not an opinion and refilling storages after those will be depleted throughout next months will be more challenging. Reasons are simple and include the lack – most likely – of Russian gas next year and the risk of more competition for LNG imports from other countries, starting from China that in 2022 reduced for the first time in history its needs due to economic slowdown.

If this and the next winter requires attention, the most important question for me is what happens afterwards… And here the issue is structural, it involves the economic backbone of Europe and will require vision and leadership – that is the third (and most important) deadline.

The “glory” of European industry comes from far away…

It is hard to say nowadays, but it is an unquestionable truth that the great development, economic expansion and increase of living standards that Europe has experienced since the end of WWII has been also thanks to access to continuous, reliable and …. cheap… sources of energy, including Russia’s ones.  

The pact that “cemented” the East and the West mutual interdependence has been sanctioned with the realisation of massive interconnecting infrastructures, starting from gas pipelines that from the prolific Western Siberia fields reach the heart of Europe. Paradoxically – and quite sad nowadays – the main pipeline that link Russia and Europe through Ukraine was called “Brotherhood”.

Underpinned by massive inflows of energy, the European industry has flourished and still today is an important component of continent’s overall economy. The use of gas in European industry in terms of fuel share is second only to the US (30% vs 50%) but still significantly higher than other key markets including Japan, China and India. While not all European countries have the same degree of gas utilisation in their industries, it is evident that high gas prices (and high electricity prices) are a massive issue for the competitiveness of European industry and through that for the overall stability and performance of continent’s economy.

Higher is the use of gas and bigger is the impact of current energy crisis. The energy-intensive industries in Europe are those most exposed to the current context and some of those not only have halted part of their operations since the crisis has erupted, but have warned of “existential threat”. The top five are iron and steel, chemicals and petrochemicals, non-ferrous metals (aluminium, copper, zinc), non-metallic minerals (largely construction products) and food & tobacco and all-together account for about 75% of natural gas consumed in the industry. If their cumulative contribution to Europe’s GDP is “only” 5% of the total, there are other metrics highlighting the vital role of those sectors. These industries employ directly almost 8 million of European workers and generate a value in the order of 650 billion euro per year. All of this without considering the huge value and jobs coming from associated supply chains.

Europe’s competitiveness at a crossroads…

Can Europe believe to maintain its level of wealth and leadership without the contribution of such strategic sectors? Difficult to believe so. Then what are the prospects? There are fundamentally two scenarios:

1. One is that all what happened since February 24 will be rapidly forgotten and we would return to a business as usual scenario. This appears not only unlikely but also very dangerous, as would leave Europe under a constant threat and blackmail from Russia. Maybe one day the relationships might – hopefully – be restored peacefully and constructive but a solid mutual trust is not something that is possible to imagine happening in the short or even medium term…
2. The second scenario is that all those flows of energy that linked Russia and Europe for several decades will not be restored. And here the Pandora vase of inconvenient truths opens up….

• Firstly, level of gas supplies across the globe for the next years points towards a tightening picture. When supply is not available – or too expensive – demand follows, but a demand destruction plan does not sound as a wise one for Europe as that would imply big recession, jobs losses and likely social turbulences…
• Second, even if Europe would be available to ensure adequate supplies of non-Russia energy, for all the reasons mentioned above - including proximity, investment of infrastructures already repaid, cost of production etc… - those supplies are likely to be more expensive, adding pressure on Europe’s competitiveness.
• Third, with gloomy prospects, several industries and associated supply chain might relocate accelerating a process of de-industrialisation.

What the road ahead? ..

The key element is that the current crisis represents an historic turning point in the energy system and even more for the future of European industry. In such context, the old motto “innovate or die” has never been more true for the industry of “old continent’. High prices are a big incentive to deploy technologies that can bring massive efficiency. That is a solution for some industries but not for all, because even if those technologies at today’s prices would have paybacks in the order of months instead of several years, they still require financial resources to invest that are not in the capabilities of every company.

The massive push from high energy prices is not the only driver. Another big one is the growing international competition, driven by what the IEA defined sometimes ago as “the emergence of a new global energy economy”. The alignment of climate goals and security concerns is now accompanied by economic and industrial reason.

Such combination is extremely powerful, to an extent that – maybe - we never reached before.

Countries around the world are implementing massive plans to positioning themselves in the industry of the future, incentivising not only consumers in adopting cleaner technologies, but increasingly focusing on the importance of developing domestic supply chains and accompanying the transition with a massive industrial programme.

The Inflation Reduction Act in the US is a clear example and already driving a boom in the re-shoring of companies that had previously placed their production abroad as well as in realisation of new important domestic manufacturing. Key sectors include the production of clean technologies like solar panels, wind turbines, batteries, but also multi-billion plant for the construction of electric vehicles. Even new mines for providing the critical minerals at the basis of clean tech are getting open in the US.

US is not alone. China, Japan, India are other key areas that are increasingly deploying resources to prepare the ground for tomorrow’s industrial system. Europe is not out of this picture, but being at the epicentre of the crisis is forcing most of governments to deploy huge amounts of resources to alleviate the impact of emergency. That is understandable and difficult to criticise, as the level of shocks for many European countries might even lead to serious political and social turbulences. 

But the time for Europe to have a serious discussion about the future of its economic (and social) backbone is now, including what measures can be deployed to conjugate the clean transition vision with a serious industrial plan.

The others will not wait… and what is at stake is existential.