The euro and pound continue to flounder as the market watches gas and electricity prices. Heavy industry is shutting down at a alarming pace and margin calls are threatening to swamp utilities.
I've written about this before but the key to understanding the European energy market is that it's no longer a market, or that it's certainly headed in that direction.
We're so engrained in living in a market economy because it's the way everything around us works. It's the most efficient way of distributing goods, services and capital.
But it's not the only way and it's not even always the best way. Market forces can break down in something as essential as energy.
In general, the fair way to distribute goods is to whoever pays the most and capital can be assigned efficiently. But cheap, reliable energy is the foundation of the economy and utterly essential for life.
In essential goods with inelastic demand, market prices can explode, which is what we have in Europe. That's why utilities are often nationalized -- it's too disruptive to risk a market breakdown.
Think of a famine: We wouldn't use market based pricing to determine who got what if children were starving. We would shift to a system of rationing and price controls to try and make sure everyone is fed. That's not ideal in the long term, but in the short term it might be the only way to prevent mass starvation.
In essence, the market has failed for European energy. So policymakers are turning to non-market mechanisms to distribute and price electricity.
At the moment, a handful of ideas are being floated including price caps, rationing (voluntary/involuntary), subsidies, nationalization, etc. There are signs of a beggar-thy-neighbour mentality in some European countries but there's also a push for unity.
What everyone agrees on is that the lights need to stay on and that allowing mass bankruptcies due to a spike in prices is unacceptable.
Right now, the trend is for governments to take the pain on their balance sheets. That's a relief for customers and businesses but risks pushing government debt to intolerable levels and that's why long-dated gilts blew out yesterday. The relief valve is eventually the currency, whether that's via future crippled growth or debt monetization.
What it also means is that market signals aren't necessarily accurate. The market-based baseload power numbers don't matter to businesses or the economy if they never have to pay them. Yes, that's a huge hit for governments but the pain is shifted to the long-term from the short term.
In general, that's a good thing but if subsidies are so high that it doesn't result in a sufficient level or rationing, then the risk is that prices stay high for longer than governments can tolerate the spending.