Their energy crisis strategy and what it means for the rest of Europe
By ZACH ROBERTS
Scholz at the Party of European Socialists (PES) EU Council preparation meeting. According to Stanishev of PES, the European Council summit should focus on “a strong, progressive Energy Union that cares for our climate while securing our external energy supply”.
A decade ago, with Europe in the midst of the Eurozone crisis, it was Germany that led the contentious push for austerity measures. Fast forward to today, Germany’s recent fiscal policies have remained controversial albeit for a different reason. Currently, this is due to a fundamental shift in their fiscal policy. A commission of leading German economists has recommended that the government implement national energy subsidisation - a move that could exacerbate the already politically hostile wealth divide across the continent.
The €91bn package would mean that the German government pays all private households’ gas bills in December and subsidises residential and industrial gas prices for more than a year from early 2023. Germany is suffering a cost of living crisis akin to the situation here in the UK, but Chancellor Olaf Scholz’s government have been advised to take far stronger action. This energy support plan would be financed by new borrowing to create a €200bn ‘protective shield’, similar to the €600bn fund set up by former Chancellor Angela Merkel during the height of the COVID-19 pandemic.
The message here from the German government is clear. Despite the COVID fund being deemed a ‘one-off’ response that would never be repeated, Germany is willing to sacrifice its economic morals to put citizens and businesses first with the largest aid package since the Russia-Ukraine war began.
However, this policy has been met with uproar. This policy has been implemented at an inopportune time - a period when the EU is advocating for a European-wide coordinated response to alleviate an energy crisis that has impacted the entire continent.
Since its establishment, the EU has always relied on Germany as the economic and political leader. Its choice to take a unilateral approach signifies a major change in political direction from the era of Merkel. Under her leadership, Germany bailed out Greece from catastrophe during the Eurozone crash, and provided equipment and financial support to many smaller economies during the pandemic. With Merkel gone, and the EU’s largest economy also struggling, this may be indicating an end to Germany’s era of economic selflessness.
The package will save the average German household €1,366 a year, but with complete state subsidisation in December, Europe is concerned that this could lead to German consumption rising and thus causing supply costs to rise for other nations.
Italy’s outgoing prime minister, Mario Draghi, said: “Faced with the common threats of our times, we cannot divide ourselves according to the space in our national budgets.” In a similar vein of fervent reproachment, Hungarian Prime Minister Viktor Orban has likened Germany’s decision to ‘political cannibalism’ with many smaller nations now fearing the very real possibility of falling into unavoidable economic chaos. Germany’s decision would also hurt other EU-wide industries. Germany’s package offers protection to its industries, allowing German businesses to exploit cracks in the single market. Berlin’s state-funded scheme offers these industries financial support and thus an advantage in the markets over other European companies that are facing reduced operations or even bankruptcy.
European Commission President Ursula von der Leyen had previously called for a bloc-wide ceiling on the price of gas — a measure Germany has objected to. She warned that Berlin’s deviation from this cooperative approach could cause “serious fragmentation” of the EU single market and that the European Commission is committed to “avoiding harmful subsidy races” in the single market.
Currently, European leaders are pointing fingers at Germany for its role in exacerbating this crisis in the first place. Germany has notoriously relied upon Russian exports of natural gas to supply its national grid, and this dependency has prevented Germany, and the EU, to take stronger action against Russia’s illegal invasion of Ukraine. With Germany desperately seeking alternative supplies, the exact impact this has, particularly with regard to international energy prices, is as of yet unproven. However, by adopting this unilateral solution, Germany has rather easily made itself Europe’s scapegoat should this cost of living crisis worsen.
It also begs the question, what does this mean for the future of the EU? Merkel was seen by many as the unofficial leader of the EU, considering Germany’s influence and contribution to the bloc. However, this approach has drastically shifted. Now her successor, Scholz appears to be distancing himself from this strategy. Will this be a permanent move or is this Germany simply making one tough call in a time of crisis? Only time will tell, but opinion seems to be split on whether this will make Germany Europe’s pariah or whether the EU’s dependence on Germany’s economic and political influence will encourage them to see past this controversial decision. Many states cannot afford to take the same action as Germany and were banking on the European Commission’s proposal of a continent-wide price cap. However, without Germany’s cooperation, this entire approach, along with the economies of the EU are likely to fall into complete disarray.
Image: Flickr/ PES Communications