MacroScope

A question of energy

By Mike Peacock
March 26, 2014

After two days in The Hague, Barack Obama moves on to Brussels for an EU/U.S. summit with Ukraine still casting the longest shadow.

Europe’s energy dependence on Russia is likely to top the agenda with the EU pressing for U.S. help in that regard while the standoff with Russia could give new impetus to talks over the world’s largest free trade deal.

Russia provides around one third of the EU’s oil and gas and 40 percent of the gas is shipped through Ukraine. EU leaders dedicated part of a summit to the issue last week and German Chancellor Angela Merkel supported asking Obama to relax restrictions on exports of U.S. gas.

Last night, Britain’s David Cameron said energy independence and the adoption of technologies like shale gas fracking should shoot to the top of Europe’s political agenda.

EU leaders Jose Manuel Barroso and Herman Van Rompuy will promise to remove all tariffs on bilateral trade, according to a draft statement seen by Reuters.

A comprehensive deal could generate an extra $100 billion in economic output annually on both sides of the Atlantic. But there is work to be done. Washington and Brussels are at odds over an initial exchange of offers to open up markets and cut tariffs, with each saying the other has not been ambitious enough.

The U.S. president will also meet NATO Secretary-General Anders Fogh Rasmussen and will, his officials say, reassure eastern European allies that the military alliance will not stand by if they face any aggression.

There are some signs that the East/West standoff over Ukraine has passed its high point. The warnings to Russia are about dire consequences if it moves into eastern Ukraine, a tacit admission perhaps that Crimea is a done deal. Moscow for its part has admitted it faces damaging capital outflows and says it is keen to maintain contact with its G8 partners.

Having said that, Obama’s description of Russia as merely a regional power will not have gone down well with Vladimir Putin.

There’s plenty of other diplomatic two-steps today. In Berlin, Angela Merkel will hold separate talks with Canadian Prime Minister Stephen Harper and South Korean President Park Geun-hye.

Chinese President Xi Jinping is on day two of a state visit to France. He will hold talks with President Francois Hollande with the bilateral focus heavily on business and trade deals.

An array of European Central Bank policymakers broke cover yesterday to declare that action could be taken if inflation dropped dangerously low.

Most interesting was Bundesbank chief Jens Weidmann, normally a hardliner, who said printing money was not out of the question although he would prefer negative deposit rates as the means to tackle an overly strong euro. That looks like a significant shift although he did stress there was no need for imminent action.

With inflation running at just 0.7 percent and the euro nearing $1.40 it is already cutting import prices in a way that will push inflation lower still. The ECB has a policy meeting next week. At its last one, it appeared to set a high bar to any action. Has something changed? Certainly the currency seems to be focusing minds.

ECB President Mario Draghi will be interviewed on French television prior to meeting Hollande. Paris would welcome a more activist stance by the central bank, having long railed about the strength of the euro. Bundesbank board member Andreas Dombret speaks later at the New York Stock Exchange.

German consumer morale held steady going into April but the surveys compiler GfK said the mood could worsen if the Crimea crisis spreads and leads to tougher sanctions from the West.

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