Energy crisis, inflation and party employment prices – economic lessons from 2021

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The year for us was economically quite unusual: the global economy is still affected by the kovid pandemic, but the situation is better than during the crisis in 2020. The economy is much easier to adapt to the situation because we already have some experience with the virus, and vaccines have helped a lot in making the situation easier. But it’s not all about kovid: there was a shortage of chips, then a big rise in the price of international transport and oil, and recently there was an energy crisis in Europe.
Inflation has also appeared in the developed world, which has been unprecedented for decades. In other words, this was anything but an “ordinary” year. Some of these situations have forced us to learn some economic lessons, or to remind ourselves because we have forgotten them.

Energy – a difficult choice between ecology, economy and security

The energy crisis that has hit Europe is the result of several things that happened unplanned at the same time. China has banned the import of coal from Australia (which is the main market from which they procure coal, which is still the single most important energy source in China). There were colder temperatures in Europe and Russia than expected, and the production of electricity from renewable sources decreased, primarily wind that did not blow for some time in the North Sea. Gas is the main fuel for heating in most of Europe and in Russia, and it was also used in industrial production, so as industrial production began to recover during the year, so did its consumption, so stocks were wasted. Then, liquefied petroleum gas (LPG) from the USA went to China instead of Europe, because its price rose to unprecedented heights, so it was not for Europe.
This was followed by a lack of wind: electricity production from RES is linked to gas consumption. Unlike coal-fired or nuclear power plants, RES production varies during the day or season. The wind is blowing too weak or too strong – there is no electricity; the sun does not shine at night, so there is no electricity; or the amount of electricity produced varies from average. This is ironed so that, when there is a surplus of electricity, it is used to fill reversible hydroelectric power plants, which can then be used by releasing water to produce electricity when production is less than consumption. But the most important way to supplement the shortages of electricity from RES, if they occur, is the production of electricity in gas-fired thermal power plants. But there was not enough gas, so the price of electricity on the spot market went sky high.
It is more natural that when creating an energy system, compromises must be made between different goals: economy, so that the price of electricity is the lowest possible so that consumers can afford it (not only households, but also the economy); ecology – primarily related to pollution that can affect health and only secondly related to CO2 emissions and security of supply. With the green mantra of renewables as the only source of energy present in much of the media, NGOs, institutions and politicians, the other two goals have been forgotten. While the use of RES is not in itself a bad thing, over-reliance on it means dependence on gas imports – which is a big problem if there is no gas.

Reducing emissions of CO2 or pollutants that poison people is also a good thing, but at the same time shutting down nuclear power plants, as is happening in Germany due to the green agenda, is a completely insane and harmful measure. Due to the opposition of the green lobby, the EU has not yet declared nuclear energy “green”, although that prolongs the time period for the green transition and makes it much more expensive – the consequence will be higher electricity prices but also much more emitted CO2. The consequences of creating an energy system without thinking about energy security and supply can have great consequences, as the current energy crisis has shown.

Steam printing leads to inflation
Inflation is everywhere and always a monetary phenomenon – said Nobel laureate economist Milton Friedman, but it seems that the printing of money surprised a large number of economists. Inflation growth this year has hit most of the world’s economies – year-on-year inflation in Serbia in November was 7.5%; in the euro area 4.9% and in the US 6.2%. In Western Europe and the USA, these rates have not been recorded for literally decades, and in our country with slightly worse results since 2012. When the monetary stimulus was launched during the previous crisis in 2008, there was no inflation in America and Europe, although some economists feared it. . It turned out that a large part of this monetary impulse was directed towards clearing the bad balance sheets of banks, and then on the stock exchange, so that the growth of loans to the economy and households was not so spectacular as to cause more visible inflation. With this experience, almost no one complained when similar monetary relief programs were launched with the advent of the crisis crown to ease the economic situation.
It turned out that snow has an awkward habit of falling in January. Inflationary pressures arose for a number of reasons: banks now did not have to clean their balance sheets of toxic assets to such an extent, factory closures due to anti-pandemic measures disrupted supply chains (one car consists of about 5,000 individual parts, only one is missing the car does not work and cannot be sold) and even trade in finished products, and oil on the fire was added by state programs to help the population. Some of them were so generous that a large number of workers in the United States paid more not to work than to work. As a result of all this, not only was there more money in the system, but this increased amount of money was now chasing less goods than it had been before. The consequence is the inflation we see around us.

Party management of companies has its price

It turned out that appointing unprofessional but party-loyal directors in public companies is not a great idea for us citizens, although it is for the parties themselves that elect such directors. Everything is even worse when those directors have been in the acting position for years. status (which, by the way, is illegal, because the Law on Public Enterprises stipulates that the duration of such a mandate should not exceed 6 months), so they have no protection from being replaced if they oppose a desire of the top. EPS has been poorly managed for years, as evidenced by the analysis of the Fiscal Council from 2019, and the main reason for that is poor management, which has no knowledge or interests to manage this company in the right way.
Economists have been saying for decades that state-owned companies are poorly managed because the whole logic of setting up their management and later business is with a political dimension: parties share directorships as part of a coalition agreement, and those directors then employ further party-linked people, well-paid jobs, and party votes. Employees are often blackmailed into having to go to party rallies of support or it will have a bad effect on their status in the company and they may even lose their jobs. These companies control media reporting with their advertising, because they do not pay for advertisements with media that write against the government, but only with those media that support it. They also serve to raise money through inflated public procurements (often with a known and only supplier who applied for the tender) in order to finance the party structure and election campaign, or enrich high-ranking party members and related companies.

There is no agreement only on how to solve these problems. It is clear to everyone that professional management should be appointed and then not interfere in its work, but how to do it? There are already existing legal regulations that should enable that, but there is no political will for that. We do not trust thieves to stop stealing because it is not nice to steal, but we lock the door, set the alarm and finance the police. The answer is not “to get the right people to the right places” according to the mantra that we just need to elect “honorable and honest” politicians and everything will fall into place – because it often turns out that honorable and honest people are not at all, especially if they are tempted to risk losing power and money if they remain, and will not suffer any consequences if they decide to behave differently. In addition, EPS was known for corruption scandals even before the SNS government, as was the case with rented cars in Kolubara that invoiced costs by working 25 hours a day.

But most nations are not educated economists to be able to read and understand financial statements or business reports of state-owned enterprises, or political scientists to be able to understand the importance of state and political influence in sectors that need to be separated from them. But that is why we can all understand very well the scale of the problem when the largest thermal power plant in the Balkans stops working in the middle of winter, so you threaten us with restrictions that did not happen just because we managed to import the missing electricity at an expensive price. If we don’t want things like this to happen, maybe now with much more serious consequences, we have to put our finger on the forehead. Because then, when we are in the dark due to the power outage, it will be too late.