Constructing A Legal European Cannabis Market Where The Black Market Loses

A major reason for legalization of cannabis is to improve the quality of cannabis available for both medical and recreational users and eliminate the black market – but that has proved a challenge for every government from Canada, to the US States – and Europe beyond that

If the German Health Minister Karl Lauterbach is to be believed, and so far he has generally performed on schedule, the draft recreational cannabis legalization now pending in drafting rooms at the Bundestag (German Parliament), will be released any day now. After that, of course, there is the matter of debate and passage in both houses of the German Parliament.

As the opposition on an EU front has appeared to dissipate, the next gossipy rumour to make the rounds within the industry is that CDU conservatives in the Bundesrat (essentially the German senate) will inevitably doom any such attempt this year.

Beyond political considerations and equations however, one of the biggest issues that any legalization effort here will face is implementing a market which is both regulated and one in which the cost of production and regulation is competitive with the black and gray market.

Squaring a So Far Impossible Circle?

This entire discussion however, as both Canada and many US states starting with California have learned, is not just a matter of black but also gray market production and integration.

The reality is, and it shouldn’t take an academic study to figure this out, that the cannabis market is a commodities market just like any other plant-based economy. Consumers are driven by price, quality, availability and on the medical side, urgent need.

Talk to any patient for more than two minutes, and the first discussion that rears its head is the terrible decision to either pay for medication or the other “luxuries” of life. Like food, rent and energy.

It is also not unfair to postulate that it is indeed patient demand which drives both the legal and illicit markets. Everywhere. That is why in Canada, there is no way to undo patient home grow and collectives, as much as the larger, better financed companies have certainly tried to do (multiple times).

Such a dilemma if not scenario is also very likely to raise its head in Germany and for a variety of reasons.

And so far, nobody has convincingly created and implemented a policy model, much less business plan to deal with that.

The Government Needs Tax Money

There is, even though it is clearly fraying, a German safety net that feels very strange to anyone experiencing it for the first time – especially as an Auslander (foreign born person). This has been paid for by a “peace dividend” that does not exist in the US or the UK, for example. For decades, and for easily understandable reasons, the German government has been required to keep its military small. That period of time may be coming to an end with increased calls for a larger percentage of a pan European budget post Ukraine war, but regardless, the percentage of its economy that the German government spends on its military is in part one of the reasons there is a much stronger social net.

That said, the entire discussion is under the same pressures just about everywhere – namely that there are an increasing number of old people and a dearth of younger people to feed a system which is in desperate need of reform. Social housing, beyond healthcare, is an issue that most Millennials, no matter how free market, are beginning to understand was beggared before they were born by Boomer policies and that has never been undone.

The twin issues of higher healthcare costs and housing is a driver that is front and center for a government also facing higher inflation, strikes and other economic malaise that includes a now sped up mandate thanks to the Russian invasion of Ukraine, for a transition to carbon free fuel.

Long story short? The legalization of cannabis will be attractive to a government in search of new sources of revenue. The problem is finding a balance that does not price the legitimate market into a non-competitive place with regards to both black and gray sourced product.

The Cost of Capital Is More Expensive

No matter where it comes from, the cost of borrowing just got more expensive. This is for many reasons, starting with international financial policy put in place to deal with inflation and more recently, some large and internationally discussed banking liquidity issues.

When this idea is trickled into the cannabis industry, this means several things. The first is that struggling firms already in business will find it hard to find investors already leery of an underperforming vertical. The second, however, is that those models that do make sense will find it much easier to raise capital at a time when high returns on any investment that is legitimate are hard to come by. See the current and highly expensive problems of big tech, for starters.

Sustainable Cannabis Is Hard To Achieve

Keeping operational costs low is a mandate in the European market, especially in an environment where the government has already established a fairly strict pricing structure at every point in the supply chain – from cultivation to retail sales from pharmacies. This means by definition, that production costs must be minimized in an environment where EU GMP cannabis must be grown indoors – or at minimum passed through an alternative certification process.

This reality in turn, feeds into the prices available to the consumer, even as legalization will begin to ease access, even for patients, including dropping the cost to them if their insurers continue to refuse to reimburse them.


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