I am always fascinated to see how different economies work, these are dynamic ecosystems and due to globalisation, we are an interconnected society. I seemingly unrelated issue in a country far away can have ripple effects that spread far and wide.
Much of the world's attention is focused on Eastern Europe at the moment. Like the previous 2 years, while everyone was focused on covid I was focused on lockdowns. And this time around, while everyone focuses on war, I am focusing on the financial impacts of questioning geopolitical decisions.
If you're not sure what I am talking about, I am referring to Germany laying sanctions on Russia. They've some Russian imports, they've stopped exporting to Russia, and they've seized assets even though the country is heavily reliant on Russian energy.
A self-inflicted wound
Germany is one of the largest producers of manufactured goods in Europe and with that comes a need for energy. That need for energy saw it have a pretty heavy consumption of fossil fuels, which Germany decided is no good and would move to green energy and offshore energy.
While Germany tries to reduce emissions, it left itself dependent on unreliable energy sources locally like wind and solar and foreign energy like French nuclear and Russian gas.
Since the country is not energy independent it puts itself in a position where it has to play nice with others. Something it hasn't done and that has hit their economy and in my opinion, could triple it if they are not careful.
Source: - cleanenergywire.org
PPI looking toward the sky
If we take a look at the producer price index it's risen by 4.83 % on the month, however year on year it's close to a 35% increase. The German economy is a manufacturing economy, so the price of energy and other commodities heavily impact its industries, and if the prices of supplies and energy increase, production costs increase.
If production costs increase, prices for goods increase, if prices of goods increase, it decreases demand for exports and makes exports less competitive, and if that happens it reduces the income of the industry.
If industry begins to suffer, we see companies struggle to meet obligations, we see companies close and we see job losses. Putting pressure on an economy that has had to recover like everyone else has from covid lockdown policies.
PPI for Germany over the last year
PPI for Germany over the last 60 years
Germany is the producer of the west
The top 10 exports from Germany are vehicles, machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport equipment, basic metals, food products, and rubber and plastics totaling around 1.8 trillion a year and contributing to a GDP of $4.55 trillion.
If exports are impacted and GDP reduces, Germany is going to have to look to its central bank for help.
Euro is the error correction
I often give the US dollar a hard time for being a shitcoin, but if we look at the Euro, it's getting crushed. It's already lost %14 of its value when compared to the dollar and I don't see how it bucks that trend. Germany and France are the engine rooms of Europe and if Germany isn't doing well it will severally impact the need for Euros and thus the value in Euros.
Eurozone cut off a big holder of Euros
The Eurozone's decision to seize Russian assets has seen Russia retaliate by refusing to accept Euros for commodities, you have to now use Rubles. Previously how it worked is Germany needed energy, it sends Russia Euros, and Russia sends them gas.
Russia then takes those Euros and uses some of them to import goods from Germany and the rest they use to purchase German Bunds. Now that you don't have that demand for Euros anymore, it will weaken the Euro and we can see that reflected in its price against other fiat currencies.
Image source: - ceicdata.com
If we look at German debt to GDP it's not moving in a direction they would like considering they are a surplus generating country. To be honest, it doesn't look good for Germany nor the Euro.
Have your say
What do you good people of HIVE think?
So have at it my Jessies! If you don't have something to comment, "I am a Jessie."
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