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Robin Brooks Profile picture
@robin_j_brooks
Jan 22, 2023 • 8 tweets • 4 min read • Read on X
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Is the European energy shock over?
1. The Euro (black) is back to pre-war levels and common measures for the Euro zone terms-of-trade - the ratio of export to import prices - have also risen lots (blue). Many are using this to claim the energy shock is over, but that's WRONG...
2. To start with, while gas prices in Europe have fallen from insane levels in Aug. '22, they're hugely above pre-COVID levels. Spot (black) and one-year ahead TTF gas prices (blue) are 260% above 2018-2019 averages. The hit to European - and German - competitiveness is HUGE!
3. How come gas prices fell?. Putin turning off Nordstream shifted the supply curve to the left from S to S'. Prices rose and consumption fell. The economy shifted away from gas to coal, moving demand from D to D'. Gas prices fell, but the hit to profits & demand is still there.
4. Falling gas prices are wrongly seen as a signal the energy shock ended. That'd only be true if the supply curve shifted back to the right from S' to S. We know that's NOT the case. Imports of gas by Germany are down -40% from 2019 levels. The shock is massive and ongoing...
5. German industry is undergoing a massive shift and retooling. Whole sectors of production have become unprofitable and certain product lines have been shut down, never to reopen. Chemicals and pharmaceuticals are the prime example. Output is down -15% from a year ago...
6. Lots of policy and market implications. The shift to the left of the supply curve is NOT inflationary but deflationary, since it's a hit to output that will bring recession. ECB hikes are hard to justify, which is why markets price cuts further out the money market curve...
7. Of course, there is the important matter that Europe did NOT go into recession in 2022, something I had forecast. The fact that Europe dodged recession was mostly due to one-offs like a rebound in auto & chip production that will fade. See this thread.
8. As far as the Euro goes, markets currently give the wrong interpretation to the fall in gas prices. First, prices are still super high. Second, they've fallen as demand and activity are getting crushed. Fair value of the Euro is down massively. Our estimate is EUR/$ at 0.9...

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More from @robin_j_brooks

Robin Brooks Profile picture
Oct 27, 2024
Take aways from the IMF/WB meetings
1. European denial: Europeans converged on DC this week. The degree of denial on the shift in geopolitics that Russia's invasion of Ukraine signifies is alarming. Short-termism rules. A strategic vision is woefully missing. A huge problem... Image
2. European strategic autonomy: there's a surprising number of folks who - in the event of a Trump win - advocate a European pivot towards China. Seriously? China allied itself firmly with Russia in its invasion of Ukraine. You may not like Trump, but this would be a disaster... Image
3. End to war in Ukraine: underlying this is a view in Europe that a rapid end to the war is good for the EU, the epitome of EU short-termism. Europeans crave an end to uncertainty, but that won't come by conceding Ukrainian territory to Putin. Putin will only be emboldened... Image
Read 9 tweets
Robin Brooks Profile picture
Jul 24, 2024
The Euro zone is like a bad game. There's high debt and low debt countries. The goal of high debt countries is to shift as much of their debt onto low debt countries, so they never have to pay down debt. Crazy thing is: low debt countries allow this to happen. High debt wins... Image
The key balance sheet for this debt shift is the ECB, where a complex jargon exists to hide this debt transfer. For example, high debt means yields periodically spike when there's global shocks. In the ECB vernacular, this gets called "fragmentation" and has to be prevented...
Calling yield spikes "fragmentation" sounds like there's financial market dysfunction, when markets are really just pricing a risk premium. Only way to prevent that risk premium is for the ECB - over time - to buy lots of debt from high debt countries. That's the debt transfer...
Read 4 tweets
Robin Brooks Profile picture
Nov 11, 2023
Western gaslighting on Russia sanctions
1. The German word for gaslighting is "Nebelkerze," which means "fog candle." Many western commodity experts and journalists loudly claim the G7 oil price cap can't work, while endorsing financial sanctions on Russia. They're gaslighting... Image
2. It's exactly the other way around. Financial sanctions on Russia can't work, while the G7 cap is the only way to squeeze Putin. We sanctioned some of Russia's banks (red), so money just flows via non-sanctioned banks (blue). Putin still gets ALL the hard currency he wants... Image
3. The driver of Russia's hard currency inflows is the current account surplus. If you sanction some banks, you're just redirecting financial flows. The fix is to sanction ALL banks, which is equivalent to a trade embargo (since Putin can no longer get paid and won't export)... Image
Read 10 tweets
Robin Brooks Profile picture
Nov 8, 2023
A. Russia sanctions
1. Financial sanctions on Russia don't work
2. We sanctioned Russia central bank (red)
3. Russia switched to using Gazprombank (blue)
4. Russia still earned the same amount of cash
5. Only way to fix this is to sanction all banks
6. That's like an oil embargo Image
B. Lesson is that you can't hurt a current account surplus country by sanctioning some of its banks. You have to sanction all banks, but that's like a trade embargo, since Putin won't export oil if he can't get paid. The G7 cap recognizes this. It targets the current account... Image
C. People who support financial sanctions and criticize the G7 cap ignore 18 months of data. We have 18 months of sanctions and a G7 cap that was undercut from the beginning. The result: Russia is back to earning big "excess" current account surpluses. Only the G7 cap fixes this. Image
Read 4 tweets
Robin Brooks Profile picture
Oct 15, 2023
IMF/WB meetings in Marrakesh
1. Deep gloom beneath the surface. At best, the US is seen as divided and distracted. At worst, it's seen as weak. Wars in Ukraine and Israel are symptoms of this. Many think the US will get tested more and more, so geopolitical risk will keep rising.
2. A meta question that hangs over everything: "What if Trump gets re-elected next year?" Such an outcome is seen as being very negative for Ukraine and Europe. Even if it doesn't happen, Putin and others have every incentive to sow confusion and instability ahead of Nov. 2024...
3. Growing recognition that popular resistance is rising towards funding Ukraine and combatting climate change. Mounting resentment in EM at G10 double standards. For example, Germany fires up coal power plants, even as much of EM gets lectured on the need for a green transition.
Read 8 tweets
Robin Brooks Profile picture
Sep 7, 2023
@steve_hanke Argentina has a population of 46 million. El Salvador has a population of 6 million, Panama has 4 million. Both countries are thus much smaller than Argentina, not to mention the fact that El Salvador has much lower per capita GDP. Not good comparators for Argentina at all...
@steve_hanke Ecuador has a population of 18 million, smaller than Argentina but better than the countries you listed. Ecuador - like Argentina - is a commodity exporter, which is key. Falling commodity prices often coincide with a soaring Dollar, which is a double whammy for dollarizers...
@steve_hanke Now let's go back to my chart. Most of Latin America did NOT dollarize. Instead, central banks were made independent, inflation was brought down, currencies were allowed to float and real GDP went up. There is no law of nature that says this cannot also be done in Argentina... Image
Read 6 tweets

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