There is record inflation, made worse by Russia’s war in Ukraine. A weak euro makes it more expensive for companies to import necessary goods. Italy, the bloc’s third-largest economy, is mired in a political crisis after the country’s prime minister was ousted. But Brzeski also keeps an eye on extreme weather conditions. A summer of drought and sweltering heat, exacerbated by climate change, is worrying businesses across Europe and weighing on economic performance at a moment when every little bit counts.
“That increases concerns,” said Brzeski.
The water level along Germany’s Rhine, which is vital for transporting chemicals, coal and grain, is so low that shipping has been disrupted and supply chains threaten to become further disrupted. Warm water temperatures in France are hampering the operation of some nuclear power plants, among other maintenance issues. And in northern Italy, farmers are struggling through the worst drought in 70 years, affecting production of crops from soy to parmesan. These climate-related issues could fuel inflation as Europe grapples with rising food and fuel prices. Inflation for the 19 countries using the euro hit an all-time high of 8.6% in June, forcing the European Central Bank to announce aggressive intervention earlier this week.
However, the ECB’s ability to act could be limited if economic activity reverses. The euro-zone saw production fall in July, according to data from S&P Global released on Friday.
Chris Williamson, chief economist at S&P Global Market Intelligence, said this means the euro zone economy is likely to contract between July and September. Fall and winter could prove even more challenging.
Drying-out Rhine hits supply chains
Extreme heat swept through the northern hemisphere last week as record-breaking heatwaves sparked wildfires in Spain and France, scorched the United States and prompted alerts in dozens of Chinese cities.
In Europe, the costs of a dry winter and spring and an intensely hot summer are piling up.
On the Rhine, Germany’s most important inland waterway for the transport of industrial goods, water levels have fallen sharply, disrupting shipping routes. The Rhine is crucial for the movement of goods, including coal, which is in greater demand as Germany scrambles to fill up natural gas storage facilities before next winter.
According to data from the Federal Institute for Hydrology, the water flow at the Kaub gauge west of Frankfurt is 45% of the average level for this time of year. The agency said this created “common obstacles” for ships. A recovery of the water levels is not expected until the end of August.
Eric Heymann, an analyst at Deutsche Bank Research, said not all ships can be loaded at full capacity. Some will decide that, according to the Federal Institute for Hydrology, it doesn’t make economic sense to complete certain voyages with less cargo.
“This is another disruption to supply chains and a risk factor for the power supply,” said Heymann.
Rhine concerns could weigh on Germany’s hugely important manufacturing sector when the river was too dry in 2018. Researchers at the Kiel Institute for the World Economy found that in a month with 30 days of low water, the country’s industrial production fell by about 1%.
worrying consequences
Warmer water temperatures are also making inland power plants more difficult to operate, as they rely on rivers for cooling. In France, utility giant EDF said on Friday that three reactors were running at lower capacity because of higher temperatures in nearby rivers. Hydropower production in Europe is also likely to be affected.
“The situation is very chaotic,” said Marco Alverà, who previously served as CEO of Italian energy infrastructure company Snam.
He’s concerned that high electricity consumption this summer, as homes and businesses run their air conditioners, could eat up supplies that need to be stored for the winter. Europe is currently stockpiling fuel in case Russia cuts supplies of natural gas.
“I’m afraid there will be power outages,” said Alverà, who now heads TES, a green hydrogen company. “Even if Russia doesn’t cut supply, the market is very tight.”
The heat is also impacting Italy’s agricultural sector, where the 400-mile-long Po River is experiencing a record low amid a devastating drought. The river cuts through the heartland of Italy, where 30% of its food is produced. Between 1980 and 2020, countries in the European Economic Area are estimated to have lost between 450 and 520 billion euros (US$460 billion) and 520 billion euros (US$532 billion) from weather- and climate-related events. The financial burden could increase in the coming years. Europe is becoming a heatwave “hotspot,” according to new research. It will also impact tourism to warmer parts of the continent, as well as worker productivity during particularly brutal times, said Tom Burke, co-founder of climate change think tank E3G.
“It will add another stress,” he said, noting that the cost of living would increase.
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