Mind continues its series of publications entitled Highlights of the Week. It highlights the main events that recently shook the global community and have a significant impact on the economies of not only individual countries but also entire regions. This edition of our newsletter is focused on the prospects for renewable energy development in northern Europe, the possible consequences of the collapse of another US bank and restrictions on European-Chinese trade.
Terrible weather, great opportunities: the energy alliance of Northern European countries
The groundlessness of the kremlin's hopes to 'freeze' Europe by depriving it of russian gas has been proven once again. Analysing the level of independence of the European energy market, The Economist has previously emphasizedthe importance of the North Sea as a potential renewable energy resource for the region. According to the publication, by 2050, a group of nine European countries plans to increase wind generation to 260 GW, and the North Sea with its stormy weather should help them.
The first step towards a major energy transformation was a joint declaration by the leaders of the governments of Germany, Belgium, Denmark, and the Netherlands, signed in the Danish port of Esbjerg last May. On behalf of the countries represented, they committed themselves to expanding offshore energy production capacity by 2030 and 2050. Over the year, the new North Sea Alliance gradually adopted more ambitious goals, culminating in a new summit last Monday in Ostend, Belgium.
The UK, France, Norway, and several other countries with direct access to the North Sea joined the signatories of the Esbjerg Declaration. The new steps agreed upon by the alliance of countries at the Ostend Summit can be divided into three areas: increasing wind generation, creating infrastructure for 'green' hydrogen, and supporting member states' nuclear power.
Wind power generation and hydrogen investments are in line with the region's current climate strategy and should accelerate its energy transformation, while the continuation of nuclear power plants in Belgium should meet the countries' short-term needs. In addition, Belgium's main research centre for nuclear energy received €100 million following the summit to develop small modular reactors to ensure the safety and sustainability of the European nuclear industry in the future.
In 2022, the alliance's total renewable energy generation capacity was just under 30 GW. About half of this was produced by the UK, followed by Germany and Denmark. Norway and the Netherlands, which currently account for only 11% of the region's total wind generation, plan to increase production by 7–50 times by 2030. In its turn, the Danish government has promised to create the world's first 'energy island' within three years, linking several wind farms at sea with power distribution stations on land.
Another important outcome of the summit was the deepening of energy cooperation between the participating countries: the existing offshore capacities of individual countries should be integrated into a single energy system in the future. Thus, the NY Times writes about the intentions of the leaders of the United Kingdom and the Netherlands to combine electricity supplies from wind farms in both countries. On Monday, 24 April, Norway, which began cooperation with the countries of the region in 2021 when the North Sea Link cable was laid between it and the UK across the North Sea, announced the expansion of its strategic partnership with the EU in the field of offshore power generation and CO2 capture and storage (CCS).
Western experts predict that in the future, the North Sea will become a single hub for the production and distribution of renewable energy for the entire EU. Separate wind farms will be combined into 'islands', as Denmark plans to do. In addition, the emptied gas reservoirs and the possibility of filling them with carbon have revived the interest of climate economists in the aforementioned CCS technologies.
Last year, access to quality and secure energy has already prompted some tech giants, such as Microsoft Azure and Amazon, to locate some of their industrial facilities in Scandinavia. And while not everyone is convinced that Europe's ambitious plan to electrify the North Sea will win the hoped-for attention of global investors, wind turbines there promise to boost not only the energy sector but the EU economy as a whole by the end of the decade.
False alarm or first wake-up call for the financial system: another American bank on the verge of bankruptcy
After the Silicon Valley Bank (SVB) collapsed on 10 April, the US federal government rushed to guarantee the safety of depositories and, with it, the stability of the entire financial system both at home and abroad. "Our banking system is safe," US President Joe Biden said in his address at the time.
In an article dated 19 April, The Economist estimated that the overall damage to the US banking sector was negligible. The devil, as usual, was in the details. Another bank in the country, First Republic (FRB), whose problems had begun in March, simply did not have time to disclose its financial statements for the first quarter of 2023. The results became public on Monday, 24 April: a loss of more than $100 billion in deposits, a critical lack of capital, and a level of creditworthiness that was melting before our eyes.
Within a month, First Republic lost $72 billion in assets – 40% of its total deposits. Even the $30 billion recapitalization carried out jointly by the heads of the country's largest bank, JPMorgan, the US Treasury Department and the Federal Reserve in March did not help the bank, and by midweek, the value of FRB shares had lost 90% of their annual value.
Eventually, this Saturday, the Federal Deposit Insurance Corporation (FDIC) decided to close the bank and take control of its assets.
FRB is the third US bank to fail since March. The panic among depositors was triggered by the rise in interest rates in the first quarter, which led to a depreciation of long-term bonds, in which the financial institution held a significant share of its assets. However, the main reason is broader. As in the case of Silicon Valley Bank and Signature Bank (which also failed in March), most of the deposits in the FRB account were not insured by the state, as they exceeded the $250,000 limit set by the FDIC.
For the US financial system, another collapse is yet another manifestation of negligence on the part of both the institution's management and a wider range of stakeholders, including state financial regulators. The US Federal Reserve's report on the causes of SVB's failure, which should be released this week, is likely to confirm the supervisors' partial culpability for the bank's collapse, as US law allows and even obliges the Federal Reserve to intervene in the operations of individual banks if it sees them as unjustifiably risky.
Moreover, according to the FT, credit agencies often overestimate the investment attractiveness of banks until they actually collapse, misleading both investors and depositors.
The collapse of the first bank in March has already cost government agencies at least $20 billion in guarantees and compensation. If First Republic also fails, regulators will face a difficult choice: cover only guaranteed deposits and allow large banks to suffer huge losses on assets previously deposited with the FRB, or take at least a portion of these losses under the Federal Reserve's guarantee. In the first case, the government would risk a wider panic among investors and depositors, now among the largest US banks, and in the second case, it would cover the losses of private actors at the expense of the US taxpayer.
While the recent string of bank failures is not a reason for apocalyptic predictions, the continuation of unexpected collapses raises questions about the future of the banking sector in general, including the role of government and market regulators.
Partners and rivals: EU restrictions on trade with China
"China is a partner, competitor and systemic rival… The systemic rivals aspect is increasing more and more," German Foreign Minister Annalena Baerbock described current European-Chinese relations a few weeks ago. Last week's news confirms this assessment. Bloomberg reports that Europe is reviewing its export/import policy with its largest trading partner, leaning towards reducing trade in some industries.
The Dutch government was one of the first to impose export restrictions. On 8 March, the Dutch Cabinet of Ministers decided to ban the supply of semiconductors and related technologies to China by the Dutch company ASML. According to the NL Times, the Dutch intelligence service AIVD this April called China "the biggest threat to the country's economic security".
According to Bloomberg, German Chancellor Olaf Scholz has also discussed possible sanctions against China's chemical industry with US officials (although the country officially denies this information).
Even Italy, whose economy is even more dependent on Chinese imports, has already taken the first steps towards decoupling, as reported by Reuters. In addition, Italian Prime Minister Giorgia Meloni, according to the outlet, is considering withdrawing from the Chinese economic initiative "One Belt, One Road".
Bloomberg insiders report that the G7 leaders have already agreed to pay special attention to the issue of economic relations with the East Asian giant during their next meeting in Japan in May.
According to Eurostat, the total trade turnover between the EU and China exceeded €850 billion last year. The volume of imports of Chinese goods by the countries of the bloc increased by 32% between 2022 and 2021. Amid growing concerns among G7 members about the Chinese government's support for the russian war in Ukraine, Western politicians are taking a harder line on further expansion of trade relations with the Asian partner. At the same time, there is a renewed rapprochement between the leaders of European countries and the United States, which indicates that Europe is aware of the Chinese threat to its security and the long-awaited change in its economic strategy towards China.
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