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UK inflation is below the OECD average, and growth is beating Europe - Energy And Water Development Corp

UK inflation is below the OECD average, and growth is beating Europe

Half of the French nuclear fleet is out of action. The day-ahead spot market for electricity in France on Wednesday morning was €488 MWh, ten times the decade-long average. Futures contracts are pricing in yet higher levels over the winter.

The equivalent price in the UK is €256 MWh, which is why the UK is sending 2.06 gigawatts to France via the IFA 1&2 interconnectors right now, earning an enormous arbitrage spread and improving our monthly trade deficit, which needs a lot of improvement. 

So yes, French inflation is lower but to suggest – as Team Brussels is apt to do – that France has got this energy crisis right while the UK has got it horribly wrong is a stretch. 

The latest PMI survey data of manufacturing and services belies a second false narrative, that the UK economy is in worse economic shape than the eurozone this year and is clattering into a particularly severe recession. 

S&P Global’s composite index for the eurozone fell below the boom-bust line in July and is signalling outright recession, even though fiscal policy has been much looser in France, Italy, and Spain.

The UK is still above water at 52.1 on manufacturing and 52.6 on services. The performance is soggy but not as bad as many predicted, or that I feared. It caps several months of relative outperformance. 

In my view, the UK will slide into recession later this year as the global economy rolls over. The downturn could be severe if the Treasury continues to push a contractionary, pro-cyclical policy of budget consolidation into the teeth of a slump.

However, the eurozone is also in trouble. The underlying contraction of the real money supply is flashing a red alert, and the end of QE bond purchases by the European Central Bank has ripped away the Club Med debt shield. The long-standing pathologies of a half-baked monetary union are again coming to the fore. 

Is there a lender of last resort for eurozone sovereign states in trouble under the legal constraints of the Maastricht Treaty, or is there not? We do not know.

The ECB has tried to fudge this confusion with a new “anti-fragmentation” tool but is so paralysed by political differences within the governing council, and so afraid of the German constitutional court, that nobody is sure whether it can be used, short of a systemic crisis. Therefore a systemic crisis is what markets will inflict.   

Britain is indeed in a horrible mess but for reasons that mostly have little to do with Brexit. The eurozone is in an equally-horrible mess, and arguably suffering an even worse confluence of headaches for reasons that have a great deal to do with the construction of EMU.

Germany in particular has manoeuvred itself into an economic and political crisis of Zeitwende proportions by outsourcing everything: its energy supply to Putin’s Russia, its aggregate demand to Xi Jinping’s China, its military defence to America, and its monetary policy to the ECB – in the lapidary words of Deutsche Bank board member Paul Achleitner.

It is not Schadenfreude to point this out. The blunt truth is a necessary corrective to those in the UK’s internal Briton-to-Briton political debate who compulsively exaggerate the EU’s relative economic performance without having the foggiest idea what is actually happening across the Channel.

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