In June 2021, inflation was still close to 2%. In August 2022, it was above 10% in the European Union (EU) as a whole. But that number hides a remarkable divergence between countries. In Estonia, inflation reached a stunning 25% in August 2022. In France, it was 6.6%. In Switzerland, not an EU member state, inflation was just 3.3%.
A year before, in June 2021, inflation was very close to 2% in most European countries. With 5.3%, Hungary had the highest inflation. Inflation was lowest in Portugal, at -0.6%.
In this post, we’ll look at the change of inflation in 31 countries: the 27 member states of the EU, and the United Kingdom (UK), Norway, Switzerland and Iceland.
How can we explain the dramatic, uneven rise in inflation?
Consumers are paying a lot more for energy than they used to. Companies also face higher energy bills, which has an impact on the price of their goods and services.
But energy prices are set on international markets, e.g. for oil, gas, coal and electricity. Why doesn’t expensive energy result in a similar rise of inflation across Europe?
As the following figure shows, there is a strong correlation1 between the rise of inflation and the ratio of energy use to GDP2. As a general rule, the more energy a country needs to produce a dollar of economic output, the higher its inflation. Countries in Central and Eastern Europe have higher energy intensities and higher inflation rates than their Western European neighbors.
Countries with a lower GDP per capita tend to be more energy intensive.
So it’s not surprising that Central and Eastern European countries, who are relatively poor, are experiencing higher inflation than the West3.
But it’s not just an East-West story. Even within regions with similar GDP per capita, the more energy intensive countries experience higher inflation. For example Central Europe4,
The picture is less clear in Western Europe. The energy intensity of Luxembourg and Ireland is distorted by the denominator (small countries with a very high GDP per capita due to the presence of international companies). France already limited energy prices in 2021. The Nordic countries are just weird ¯_(ツ)_/¯
What’s going on in Iceland? Iceland is a rich country with an abnormally high energy use. Why doesn’t this result in much higher inflation?
What other factors could contribute to the rise of inflation?
According to economic theory (NAIRU, Phillips curve), when unemployment is “too low”, workers demand higher wages. And higher wages lead to higher prices.
However, there is no correlation7 between unemployment8 and the change of inflation in Europe.
Inflation rose more in Spain and Greece than it did in Germany, although the German unemployment rate is much lower.
Government deficits and debt
Do deficits cause inflation (Fiscal theory of the price level)? It makes intuitive sense that if the government spends more money into the economy than it takes away with taxes, this deficit leads to inflation.
However, there is no correlation9 between government deficits10 and the rise in inflation.
Denmark and the UK have the same change in inflation, although the Danish government ran a budget surplus in 2021, while the British had an 8.1% deficit. Finland and Estonia had similar deficits, but their inflation numbers are very different.
What about public debt? Maybe inflation goes up because people lose confidence in the sustainability of the debt. Or because governments choose to inflate away the debt.
However, there is a slightly negative relation11 between government debt and inflation12.
Greece, with its massive government debt, has experienced a smaller rise in inflation than the Baltic countries, where government debt is very low. Estonia has both the lowest government debt to GDP, and the highest inflation in Europe! Inflation is higher in the Netherlands than it is in Italy, although Italy’s debt-to-GDP ratio is almost 100 percentage points higher.
The picture shows central bank policy rates13 on June 1, 2022. Since that time, central banks have raised interest rates in an attempt to tamp down inflation.
But it’s not clear that interest rates have an effect on Europe’s inflation. In the euro area, where the ECB sets monetary policy for all 19 member states, inflation rose by 4.7% in France and 21.5% in Estonia.
In Slovakia, a country with a negative interest rate, the rise in inflation (+10.9%) is similar to neighboring Czech Republic (+14.6%), Hungary (+13.3%) and Poland (+10.7%), where policy rates were over 5%.
In conclusion, Europe’s worse inflation in generations is driven by energy. Conventional factors monitored by central banks don’t seem to play a role.
This work started as a small project I did during the summer, using June 2022 inflation instead of the change of inflation (see tweet below). In this post and in the video, I used the latest available data. I also added six countries (Bulgaria, Croatia, Cyprus, Malta, Romania14 and Iceland) to the dataset.
If you have any questions or suggestions about this work, you can find me on Twitter @janmusschoot or mail me at firstname.lastname@example.org.
For my professional services, please contact me on Linkedin or mail me at email@example.com.
Twitter user Rasmus checked the data points I posted in June. His test shows that the regression line slope is different from zero:
Some further thoughts about energy prices
It is remarkable that there is such a strong correlation between inflation and energy intensity, given the different energy mix between countries. For example, natural gas is the most important fuel in Italy. Poland mostly burns coal, while Sweden relies on wood. While natural gas and coal prices are up hundreds of percent, that’s not the case for oil or nuclear.
Other complicating factors that my analysis doesn’t take into account are price caps for energy (e.g. France), and the energy intensity of exporting industries (which should have less of an effect on domestic consumer price inflation).
What’s the deal with the Baltics?
The three Baltic countries (Estonia, Latvia and Lithuania) are outliers. Their inflation is much higher than we’d expect based on their energy intensity. It’s not obvious that the fact that they share a border with Russia is the explanation. Finland, a euro country like the Baltics, also borders on Russia and has a relatively low inflation.
There are several reasons why inflation is higher in the Baltic states than the average in the euro area. The share of energy goods in the purchasing basket of consumers in the Baltic states is larger, which has affected the rise in the price of the consumer basket. Natural gas and electricity were a little cheaper in the region before Russia’s invasion of Ukraine, but prices have now caught up to those in other countries.15
As part of my research on European banks, I looked at hundreds of websites. Here are some bloopers I encountered.
Just plain wrong
Please take into account exchange rates, Ayadi et al. Even if you don’t know that HSBC and BNP Paribas are the largest banks in Europe, the change in assets of the Nordic banks should have been a huge red flag.
The same study classifies HSBC as a retail bank and La Banque Postale as an investment/wholesale bank. I’ll take common sense over fancy statistical software any day…
I hate to bring this up on the first (working) day of 2022, but the primary objective of the ECB is still price stability.
With inflation close to 5%, it seems that talking and tweeting about the ECB’s secondary objectives is more important than delivering stable prices.
Within a year’s time, your economists have doubled their projections for inflation in 2022.
So you’ll understand that people don’t believe you when you say that inflation will go down this year.
If you do choose to stay ECB President in 2022, I wish you a firm hand.
On New Year’s day, the 20th birthday of the euro, you called the euro a “beacon of stability and solidity around the world”.
To keep it that way, the ECB will need your strong leadership.
Hello and welcome to a special episode of the Finrestra podcast.
I wish you a happy new year! Stick around till the end, because I’m giving away 250 euros.
New year, new month, so here’s a quick recap of the European financial news of December.
Santander has to pay almost 68 million euros to Andrea Orcel. Santander had offered the former UBS banker the role of CEO, but withdrew its offer.
In other legal news, a French court has reduced a 4.5 billion euro fine for UBS to 1.8 billion euro. The Swiss bank was found guilty of money laundering.
Dutch green bank Triodos will set up a multilateral trading facility for its shareholders (technically certificate holders). Since the beginning of 2020, shareholders cannot sell their certificates. It is expected that trading will resume at a price that is 30 or 40 percent lower than before the pandemic.
There was also consolidation and divestment news.
BNP Paribas has agreed to sell its American subsidiary Bank of the West for 16.3 billion dollars. Listen to episode 9 of the Finrestra podcast for our take on this transaction.
Cooperative bank Crelan acquires AXA Bank Belgium. The deal had already been announced in 2019, but was waiting for approval by the ECB. The new bank will be the fifth largest in Belgium.
Regular listeners know that I usually do an in-depth analysis of one topic after the news. However, today I want to tell you a bit about Finrestra and my plans for 2022.
I started this podcast because there are not many podcasts focused on European finance. My original goal was to do a weekly interview. But I quickly found out that this is easier said than done. Weekly episodes require more time than I have. And it hasn’t been easy to find people who want to come on the show. So I want to thank my first guests Uuree Batsaikhan, Koen Vingerhoets and Rik Coeckelbergs again!
For 2022, there will be two episodes per months. I hope that from February onwards, I will be able to interview a number of very interesting guests. Stay tuned!
If you’re listening to this podcast on Apple or Spotify, you may not know that there is also a Finrestra YouTube channel, where I post short videos about financial topics. For example, I have a series of bank profiles, including of Santander, Triodos, BNP Paribas and ING, which were all mentioned in the news recap. I also want to create more videos with short stories about European finance.
But neither the podcast nor YouTube pays my bills, and this is where you can help me. Don’t worry, I’m not asking for money, I’m giving you a chance to win money!
Finrestra stands for Financial Research and Training. So far, we have mainly worked for Belgian based clients. But I want to expand my activities to the rest of Europe. If you share my YouTube video with my two courses for 2022 on LinkedIn and tag a friend before 25 January, you can win 250 euro. I’ll put the link in the description.
This has been another episode of the Finrestra podcast. You can find my on twitter @janmusschoot. You can mail me at jan dot musschoot at finrestra dot com.
Thanks for listening and I hope you have a great 2022!”
Euro area inflation remains far above the ECB’s 2 percent target. Dutch inflation was 5.2 percent, a figure not observed since 1982. The German inflation rate was the highest since 19 ninety 2. Ironically, the union of the ECB’s own employees wants higher wages due to inflation.
In other record news, the French stock market index CAC 40 reached a new all-time high. It finally surpassed its peak from the year 2000.
There was also consolidation news:
BBVA wants to buy the stake of Turkish Garanti BBVA bank it doesn’t own yet
KBC buys the Bulgarian banking activities of Raiffeisen Bank International
The news of record high stock prices brings us to the topic of this episode: European bank CEOs should be ashamed.
Because their stocks have been horrible investments. Despite a nice rally in 2021, most large European banks still trade 70, 80 or 90 percent below their 2007 highs.
Or look at banks by market capitalization. The biggest European bank, HSBC, is only worth a quarter of American JP Morgan. And you could argue that HSBC isn’t even really a European bank, as most of its profit is generated in Hong Kong.
What’s the second largest European bank by market cap? Surely it must be a German, British or French one? Nope. It’s actually Sberbank of Russia. Russia, a country with a GDP smaller than Italy’s.
I can hear some CEOs already. How they are victims of low interest rates, low growth, overcapacity. Blah blah blah.
Instead of making excuses, take a hard look at banks like DNB, KBC, Nordea and SEB. Why are these relatively small banks worth more than giants like Deutsche Bank, Société Générale and UniCredit?
I know the answer. But do bank CEOs?
Here’s some free advice. Listen to episode 3 of the Finrestra podcast. And watch the “Bank in two minutes” series on our YouTube channel.
What will you learn? That successful banks focus. Focus on a few countries. Focus on one client segment, or at least on very complementary segments.
In contrast, banks with low profitability are often monsters of Frankenstein. They are part retail bank, part investment bank. They are active in dozens of countries.
They are big, but do they deliver what clients and investors want? The market doesn’t think so.
Now dear listener, before I go, I want to ask you a favor. For an upcoming episode, I would like to talk about Industry, the series about junior investment bankers. I recognized a lot of situations in the series. So if you work in a bank, watched Industry and would like to talk about it, please contact me! This has been another episode of The Finrestra Podcast. If you have suggestions for topics or guests, you can mail me at firstname.lastname@example.org. You can find me on twitter @janmusschoot. Thanks for listening!”
“Hello and welcome to another episode of The Finrestra Podcast. My name is Jan Musschoot. We were off last week due to the banking holiday on November 1st. So here is a recap of the European financial news of October.
The governing council of the ECB discussed inflation, but central bankers expect no rate hikes in 2022.
Italy and UniCredit ended negotiations over the sale of Monte Paschi di Siena.
Swedish Handelsbanken will leave Denmark and Finland. This fits into a trend that I discussed in episode 3 of the Finrestra podcast.
Volvo Cars had its IPO in Stockholm, one of the largest European IPOs this year
French government bonds were traded on a blockchain with central bank digital currency
ING phases out its payment subsidiary Payvision
ABN AMRO passes on anti money laundering costs to coffeeshops, which can increase fees up to 1000%
French bank La Banque Postale will exit oil and gas by 2030
Dutch pension fund ABP stops investing in fossil fuel producers by 2023
Finally, COP26 started. COP26 is the climate summit in Glasgow.
And that brings us to the deep dive of this episode.
What do banks do against climate change?
The website Our world in data has a nice overview of the greenhouse gas emissions by sector. The majority of global emissions come from energy use in industry, transport and buildings. Other activities that emit a lot of greenhouse gases include agriculture and the production of cement.
Banking or finance aren’t explicitly mentioned. Not surprising, because you only need an office and a computer to generate financial services. So the direct CO2 emissions of banks are negligible.
On the other hand, banks provide funding to coal miners, oil and gas companies, and other carbon intensive industries. Asset managers and pension funds invest in the stocks and bonds of fossil fuel producers. These assets contribute to the so-called ‘Scope 3 emissions’ of the financial industry. According to Greenpeace and the WWF, UK financial institutions are responsible for nearly double the UK’s annual carbon emissions.
But banks can also steer their clients towards lower emissions. They can refuse credit for power plants that burn coal, and divert the money to wind farms. Loans for real estate, both residential and commercial, are a big chunk of banks’ assets. Banks can stimulate borrowers to make buildings energy-efficient.
To formalize their climate commitments, 50 European banks have joined the Net-Zero Banking Alliance. This alliance is convened by the United Nations and led by the banking industry. The members of the Net-Zero Banking Alliance commit to transition their lending and investment portfolios to align with net-zero by 2050. The signatories include sustainable banks like Triodos and GLS Bank. But without the big banks, this initiative wouldn’t have much effect. However, the CEOs of most large European banks have also signed the Commitment Statement of the Net-Zero Banking Alliance. Members currently include global systemically important banks such as HSBC, BNP Paribas, Santander, Deutsche Bank and UniCredit. So far, no Belgian banks have joined.
Is the Net-Zero Banking Alliance yet another case of greenwashing? Is it all blah blah blah, as Greta Thunberg would say? It shouldn’t be.
Banks that join the Alliance have to disclose targets on how they will support the temperature goals of the Paris Agreement. These targets will be reviewed to ensure consistency with climate science. Everybody will be able to check whether banks keep their promises, because they have to report the emissions of their lending and investment portfolios annually.
This has been another episode of The Finrestra Podcast. If you have suggestions for topics or guests, you can mail me at email@example.com. You can find me on twitter @janmusschoot. Thanks for listening!”
“Hello and welcome to another episode of The Finrestra Podcast.
My name is Jan Musschoot.
The topic of today’s episode: Go big or go home!
According to economic theory, banks have good reasons to expand abroad. Bigger banks should benefit from economies of scale. A broader geographic footprint results in a more diversified loan portfolio. So multinational groups should be more resilient against economic downturns.
However, cross-border expansion is not what we observe in the real world. In fact, multinational banks have been selling their foreign subsidiaries for years. Earlier this year, American Citibank announced that it would exit retail banking in 13 countries, most of them in Asia. Last year, Spanish bank BBVA sold its unit in the United States.
Banks are also selling their foreign activities in Europe. Here are some examples, all from 2021.
British HSBC was so desperate to get rid of its French retail bank, that it sold the unit for one symbolic euro. Dutch ING also plans to leave the French retail market. That same ING has sold its retail bank in Austria. Dutch Rabobank decided to wind down its Belgian retail activities, as it couldn’t find a buyer. British NatWest and Belgian KBC have announced they would exit the Republic of Ireland.
Bankers have good reasons to leave foreign markets. Because policymakers are scared of “too big to fail” banks, so-called systemically important banks need larger capital buffers. More countries also means higher costs for reporting and compliance. Banks have learned that there are few synergies between countries, even for branchless banks that only offer online services, like ING and Rabobank.
That’s why there is a clear trend towards deglobalization.
But that’s not the end of the story. Not all banks are returning to their domestic past.
Economies of scale are a thing, but not in the sense that bigger is always better.
What you want is to have scale within a market.
A good example is Societe Generale. The French financial services group sold most of its Central and Eastern European units. But SocGen kept its subsidiaries in the Czech Republic and in Romania. In both countries, these banks are the third largest in the market. Hungarian OTP sold its small subsidiary in neighboring Slovakia to KBC-owned CSOB. But OTP has also recently signed a deal to buy the second largest bank of Slovenia. Merged with its existing Slovenian subsidiary, it will become the market leader. And this silent consolidation isn’t limited to the East. French Credit Agricole has been gradually increasing its market share in Italy, for example.
So while European policymakers despair at the lack of cross-border mergers and acquisitions, the much needed consolidation is happening. Banks are reducing their geographic complexity.
And some groups have become robust multinational banks that have a significant market share in multiple countries.
If you want to discuss banks’ strategy, you can find me on Twitter @janmusschoot.
To learn more about our research and courses, check out our website, finrestra.com.
“Here’s what you need to know about the debt ceiling.
The main player in this drama is the US congress. Congress is the legislative body of the federal government, similar to parliaments in Europe. Congress makes the laws.
In particular, Congress specified how much the US should spend on things like social security and the military. Congress also passed laws on taxation.
These laws are executed by the Treasury, what we call the Ministry of Finance in Europe.
Because expenditures exceed the tax revenue approved by Congress, the Treasury needs to borrow the difference. So US government debt goes up.
And that’s where the debt ceiling comes in.
In addition to laws on spending and taxation, Congress also passed a law on the maximum level of government debt. This so-called “debt ceiling” is currently somewhat above 28 trillion dollars.
If Congress doesn’t raise the debt ceiling, the Treasury has a huge problem.
To comply with the law, Treasury has to spend money on existing programs. But according to the debt ceiling, it cannot borrow any more money. And Treasury cannot create new taxes, that’s the responsibility of Congress.
So it seems that the Treasury is trapped in an impossible trinity, where it cannot satisfy the three demands of Congress (spend, tax, debt ceiling) at the same time.
But some smart lawyers have discovered a loophole.
Treasury has the right to make money. Specifically, the Treasury can mint coins from platinum, a precious metal. But the value of the coins isn’t in the metal. The coin can be whatever value the Treasury says it is. Just like a 100 dollar bill is worth a hundred dollars because it is issued by the Federal Reserve, not because the material is worth a hundred dollars.
So when Congress doesn’t raise the debt ceiling, Treasury can make a trillion dollar platinum coin. That way, it has extra money to keep paying the existing spending programs approved by Congress, without increasing the debt.
There’s a website, mintthecoin.org, which has answers to a lot of questions on the proposal to mint a trillion dollar coin. For example, whether it’s legal (yes, it is) and whether it would lead to hyperinflation (no, it won’t).
I hope you enjoyed this episode of the Finrestra Podcast. Don’t forget to listen to ourfirstepisode with Uuree Batsaikhan of Positive Money Europe. You can follow me on Twitter @janmusschoot, that’s @ j a n m u s s c h o o t. Our website is finrestra.com. Thanks for listening!”