Economy 17 October 2024, 1:54pm

Europe has lost, we are creating problems for ourselves - Mol chief

Portfolio

Zsolt Hernádi, Chairman and CEO of Hungarian energy group Mol, has given a presentation at Portfolio's Budapest Economic Forum 2024 conference on Thursday. Addressing the prospects for European competitiveness, he stressed that while national sovereignty in political matters should be left to countries, cooperation is needed at the economic level. Once again, common sense must prevail at the policy level and we must stop thinking in campaign terms and realise that we are creating the problem ourselves. The European energy industry must not only be saved, but also made more sustainable and competitive, the private sector alone cannot finance the full cost of the transition, and to achieve the ambitious targets, the investment-to-GDP ratio must increase by 5%, he stressed.

Economic policy must be reviewed

The central theme of Zsolt Hernádi's speech was European competitiveness. He said that the EU needs to develop closer European economic integration, but while retaining national sovereignty, the "duplex veritas" or double truth of the 21st century.

National sovereignty should therefore be left to countries on political issues, but cooperation is needed at the economic level.

For quite some time now, we have been witnessing a trend of declining competitiveness in Europe as a result of the decline of business rationality and bad economic policy decisions, and as a consequence, European industry is leaving the continent, Zsolt Hernádi pointed out.

Industry players have been sounding the alarm since 2005 that the EU's competitiveness will decline, mainly to the benefit of Asia. Fortunately, this issue has recently become more prominent at the policy level, as illustrated by the Draghi report on the competitiveness of the continent. The problem has been recognised, but the hard part is yet to come, he stressed:

If we want to be back in the race, we need to put European economic policy on a new footing.

We create this problem for ourselves

The rethink must start with "common sense must once again dominate" at the policy level, in particular for the highly ambitious decarbonisation targets. According to the Chairman-CEO, the current transition targets are over-ambitious, as the cost of transition is not nearly commensurate with the benefits of transition, and the technological preparedness is not there.

According to the latest analysis, the annual return on net-zero emission targets is much lower than the corresponding annual costs,

The costs are ultimately paid by society, and there is a limit to what we can tolerate.

According to Zsolt Hernádi, we need to stop thinking in a campaign pattern and realise that we create the problem ourselves by falling for campaigns.

A good example is the decoupling from Russian energy sources, which has cost Europe a year of GDP growth, he stressed. What is currently happening in the oil market is that India, Türkiye and Brazil buy Russian oil and then sell the refined products to European countries. Before the war, 2-3% of Russian seaborne oil shipments went to India, but now the figure is around 65-70%.

On the one hand, this has an enormous CO2 footprint, and on top of that, Russia's revenues have not decreased to the same extent.

What has happened is that the profits from refining are not going to Europe, Asia has won and Europe has lost.

Thanks in part to misguided policies, the European energy-intensive industry is suffering and has virtually collapsed, as European energy is much more expensive than elsewhere. Steel production has declined, the EU has lost two thirds of its primary aluminium production since 2008, and 70% of ammonia production capacity was shut down during the energy price peak of 2022, while imports have increased significantly.

Others are getting rich, [and] we are paying for it,

said Hernádi.

With this in mind, we must preserve what we can.

The energy industry is still on its feet, but it has become an endangered species.

European refineries are reducing capacity, while huge new refineries are being built in Africa and Asia, targeting the European market with their products. But energy is needed by all industries, and imports will not come if the supply chains that were thought to be stable are broken, Hernádi pointed out.

WITHOUT ENERGY THERE IS NO INDUSTRY AND NO CONSUMPTION AT THE CURRENT LEVEL,

underlined Hernádi.

"Decarbonisation must not be equated with deindustrialisation, industry and traditional industries must be preserved", he stressed. With increased energy demand, fossil fuels will still play an important role in the energy transition, and without security of supply, Europe will fall into decarbonisation. The new incoming energy types (solar, wind and nuclear) will only cover the additional consumption by themselves, added Hernádi.

Investment must be stepped up considerably

The European energy industry must not only be saved, but also made more sustainable and competitive, he continued. This requires, among other things, a modern electricity grid, pipeline infrastructure, power plants, refineries and energy storage and an infrastructure of [EV] chargers.

But we also need to increase interconnectivity and enable cross-border energy flows and trade, and perhaps most importantly, strengthen the single market.

The private sector alone will not be able to finance the full cost of the transition, stressed Hernádi. The EU's ambitions require an unprecedented scale of investment growth, and

to meet the ambitious targets and annual demand, the investment-to-GDP ratio needs to increase by five percentage points,

he stressed.

Investment in modernisation and efficiency gains requires both national and community support. As Hernádi put it, "they should burden companies [further], it should not be a political issue."

This has not been the attitude so far, as last year Mol paid 113% of its Hungarian profit to the Hungarian budget in the form of various taxes, the CEO stressed. Countries' budgets are turning to new revenue streams. In addition to the extra taxes, banks, for example, are buying a lot of government securities in Hungary, and credit is growing significantly. What happens is that big companies finance the state, and the state passes the money on to consumers.

This redistribution is not forward-looking, nor is it a problem specific to Hungary; political leaders in many European countries have taken similar steps.

At the end of his speech, Hernádi returned again to the fragmentation of the EU, which constitutes a major competitive disadvantage vis-à-vis the US. This is ultimately the concept of double truth:

It is time to find a balance between national sovereignty and economic federalism.

In political matters, the authority of nation states must be preserved (because there will never be consensus in politics), but the economy must become the arena for deeper cooperation. Because the economy is rational, 1+1 always remains two. And it will always be two whether you are in Spain, Germany or Hungary.