Forget the Energy Union In Case of Grexit

The economic situation in Greece and the geopolitical complexities in the Mediterranean are likely to outshine any effort to increase energy security in Europe. And, in a sense, that is obvious. An eventual GRexit would have knock-on effects on energy projects, regional balances and climate change too. The entire Energy Union vision could be undermined in its infancy, less than a semester after it was presented to the public. 

Along with a clear intervention of a person with knowledge of the facts who said that Israel’s Leviathan field will “not be developed in the foreseeable future,” the GRexit was the most important point touched by experts during a conference organised Wednesday by the German Marshall Fund of the United States, Greek Energy Forum, and Natural Gas Europe. Greece is indeed under the spotlight in several sectors, energy included. 

One of the propositions presented was quite straighforwards. If the European Union does not manage to solve the Greek dilemma, could it proceed with projects that are even less concrete than a bailout deal? Can Brussels proceed with something for which there is not a clear deadline, not a tangible urgency, like the Energy Union? Can the European Union be credible in a new mission, after failing in a clearer one? 

Adding to that, it seems increasingly obvious that, also among the European institutions, there is a lack of know-how. If the geopolitical complexities in the Middle East limit the prospects for gas imports from Israel and Cyprus, the economic dynamics, and the political inabilities make the prospects even worse. 

THE BLEAK SCENARIO: GEOPOLITICAL COMPLEXITIES 

“Almost nothing good is happening. At the moment, we are confronting a scene that is extremely challenging” commented one expert during the conference held under Chatham House rules, referring to the situation in the Levant. 

The expert suggested that tensions in the region are likely to increase over the next months. These uncertainties then add to the current Greek crisis, which is not a positive factor for energy projects either.  

“Does it stop projects? Probably not, as the Greek economy has to re-invent itself, … but it really does not help” he said. 

THE EVEN BLEAKER SIDE: THE DRACHMA, AND THE DRAMA OF A CONFIDENCE CRISIS

This geopolitical framework does not create the conditions for investors to be bullish. At least for the Greek crisis, experts agreed on the European responsibilities.  

One expert, in particular, conceded that in his long international career, he never encountered such a divergence in position between economists, who keep explaining that it is not possible to suffocate the Greek economy anymore if the aim is to see Athens grow again, and politicians in Brussels, who keep underlining the importance of austerity.  

A GRexit would not then only be a regional source of instability. It could send shockwaves worldwide. Equally, it would have repercussions on all the sectors. Focusing on energy, several regional interconnectors could not make financial sense anymore. For instance, the interconnector to be built to Bulgaria would be of dubious utility. 

“Even though the financing of this project would not come from Greek sources, I think the knock-on effects of the prices would raise questions” one experts said, referring to the case in which Greece left the Euro and went back to the Drachma. 

The argument here is that the Drachma would be immediately devalued (experts said that it would be devalued at least 50% with respect to the exchange rate that was used when Greece adopted the Euro). Given the fact that energy prices are denominated in dollars, this would decrease the competitiveness of energy imports. Greece would then rely more and more on renewables and locally produced lignite. Gas would become not competitive, from one day to the other.  

NO GROWTH, NO LEVIATHAN  

Speaking about future options, a panelist stated that trust is needed to attract investors. The bottom line is that private investors want as many certainties as possible. Especially for multi-billion projects with an extremely long payback period, political certainties and growth are needed. 

“You need first of all trust; when the political trust is there, investments will come” an expert conceded, adding that Brussels often makes the mistake of treating private investors’ decisions as an independent variable, not correlated to growth and demand. 

With no regional economic growth and political stabilisation, major projects would not be bankable either. 

“Leviathan will not be developed in the foreseeable future” a person with knowledge of the facts clearly stated at the end of the conference.  

ANY WAY FORWARD? 

On Wednesday, pundits voiced for mechanisms to make Greek debt sustainable in the medium to long term - now it is not, a panellist strongly claimed. According to him, the debt should be reduced either through a complete default, through bonds with no final date, or reduced interest rates. That would be the only way to allow the Greek economy grow again. 

At the moment, the political crisis is within the Eurozone, but a GRexit would deteriorate overall European prospects, creating additional distrust and further fueling the current European confidence crisis. Europe has to find a solution to the Greek crisis. Otherwise, forget the Energy Union. There would be more urgent priorities to solve, larger gaps to fill, and energies to be spared to avoiding an increase in external influences in Europe.

Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci