by Damon de Laszlo, ERC Chairman
As the holiday season draws to a close and we head towards September, a number of pending and actual economic train crashes will occur, following each other in quick succession. The lack of strategic thinking in the European and the UK governments will be felt with a vengeance. Power supplies across the world are under stress, but this is particularly so Europe-wide. The problem has been greatly exacerbated by the Green movement which has dominated a lot of governments’ thinking as politicians pander to short-term pressures, almost deliberately disregarding the longer strategic implications.
It is clearly a good thing to close down highly polluting coal-driven power generation, but negligent not to provide a clear runway and timetable for alternative supplies. Nuclear generation is a well-known technology, virtually carbon-free, much safer than coal mining and surprisingly, even wind turbines. It is an industry that requires long-term and consistent planning but is also opposed by Greens. The lack of long-term consistent policy has meant the runway for building out wind, solar and hydro energy is delayed by local planning disputes, greatly increasing costs. Further delays, with possibly more serious consequences, have been caused by the lack of a policy to build out the known requirement for infrastructure.
Climate change is a very serious issue, but it is surprising that there is no effective inter-governmental strategic body dealing with it and its ramifications. While politicians have met at the COP conferences and professed their support and belief in the need to address climate change, they have enjoyed the publicity, the photocalls, and then gone home and effectively ignored the complex issues of how to implement policies, along with the resources and planning required.
The issues facing us through 2022 and 2023 regarding energy and food security are turning into a crisis. While the crisis has been brought forward by Covid and Russian terrorism in Ukraine, the fundamental issues that have been left unaddressed for the last five to ten years are going to make it far worse. Unfortunately, Western, and in particular European, economies have been further destabilised by the handling of the financial crises of the last twenty years. Central banks, theoretically independent, did not have the courage to tighten money supplies as we came out of the last financial crisis, and they were lent on to support huge amounts of government expenditure to mitigate the Covid pandemic. This has fueled underlying inflation which has been added to by the fuel and food crises.
The classic method of dealing with inflation has been to raise interest rates to the point where the economy is driven into recession, so bringing supply and demand back into balance. However, the disruption of supply chains by Covid and energy and food supplies by Russia will not be brought back into balance by an interest rate induced mild recession; only by a virtual shutdown of large areas of the economy and an enormous increase in poverty, with possible starvation. The severity will be increased in the aftermath of the rising European temperatures which are reducing food supplies and electricity supplies as a number of European power stations are being shut down as water levels drop.
The problem for the UK and Europe, in particular, is going to be politicians and their efforts to keep the lights on for their voters, which will shut down industry. Plans are already in place to do this but intensive energy users, owing to the precipitous rise in energy costs, have already started to close plants. Steel manufacturing, glass manufacturing, the raw material suppliers of building materials – bricks, etc., along with fertiliser manufacturers and the smelters of non-ferrous metals, are starting to close. In a lot of these industries, the costs of re-starting after shutting down are prohibitive. Europe will become dependent on American, Chinese and Russian raw material supplies – an alarming thought that we will become a post-industrial society!
The knock-on consequences for Africa and, to a lesser extent, Latin America, are deeply worrying but Asia should be less damaged. Most ASEAN governments learned lessons after the ASEAN financial crisis. They are not immune from crises, but most are much more resilient. China is problematic while it is also suffering from droughts, which are severely curtailing energy supplies in the south. Its perhaps misguided policy of dealing with Covid by locking down whole areas of population will gradually change. The government’s strategic planning to make them independent of the West, already mostly achieved for raw materials, will over a slightly longer term make them independent of western technology. The government’s long-term policy to increase the living standards of the population will probably mean that they will return to growth, albeit at a slow rate, relatively quickly.
America, which has a political and economic structure that is almost the mirror opposite of China, will also recover in the fairly short term. Economic decisions are taken at business and local levels, mostly unhampered by central government bureaucracy. One could call the US economy ‘evolutionary’. It works like nature, with no planning, just endless experiments. The successful succeed, and if it doesn’t work the business fails and new companies arise. The reshoring trends, as companies realise that automation enables them to compete with cheap labour areas and at the same time avoid long supply chains, will give America the potential for considerable growth in the next few years. Quite likely reversing the current trend.
Damon de Laszlo
22nd August 2022