December 8, 2022


Germany tops the cost list, hit hard by its overdependence on Russian gas supplies
Germany tops the cost list, hit hard by its overdependence on Russian gas supplies

Almost every week now, European governments are announcing emergency measures to protect households and businesses from the energy crisis stemming from Russia’s war in Ukraine.

Hundreds of billions of euros – and counting – since Russia attacked its pro-Western neighbor in late February.

The government has done everything: from lowering gas and electricity prices to bailing out struggling energy companies and providing direct assistance to families to fill up their cars.

Public spending continues even as EU countries have already accumulated mountains of new debt to save their economies from the Covid pandemic in 2020.

But some leaders have taken pride in using their public purse to fight the new crisis, which has fueled inflation, raised the cost of living and raised fears of a recession.

After announcing 14 billion euros ($13.9 billion) in new measures last week, Italian Prime Minister Mario Draghi boasted that it put Italy “among the countries that have spent the most in Europe”.

The Bruegel Institute, a Brussels-based think tank that tracks EU government spending on the energy crisis, ranks Italy as the second-biggest spender in Europe after Germany.

Rome has allocated 59.2 billion euros from September 2021 to protect households and businesses from rising energy prices, accounting for 3.3 percent of its gross domestic product.

Germany topped the list with 100.2 billion euros, or 2.8 of its GDP, as the country was hit hard by its heavy reliance on Russian gas supplies, which have dwindled in suspected retaliation for Western sanctions against Moscow for the war.

On Wednesday, Germany announced the nationalization of volatile gas giant Uniper.

France, which shielded consumers from rising gas and electricity prices in early November, has so far allocated 53.6 billion euros, representing 2.2 percent of GDP.

According to Bruegel, EU countries have now accumulated €314 billion from September 2021 to date.

“These numbers are going to increase as energy prices rise,” Simone Tagliapietra, a senior Bruegel fellow, told AFP.

A typical European household’s energy bill could reach 500 euros per month early next year, compared to 160 euros in 2021, according to US investment bank Goldman Sachs.

Measures to help consumers range from a special tax on excess profits in Italy to freezing energy prices in France and subsidizing public transport in Germany.

But the spending follows a pandemic response that has increased public debt, which in the first quarter accounted for 189 percent of GDP in Greece, 153 percent in Italy, 127 percent in Portugal, 118 percent in Spain and 114 percent in France.

“Initially designed as a temporary response to what was supposed to be a temporary problem, these measures have ballooned and become structural,” Tagliapietra said.

“This is clearly unsustainable from a public finance perspective. It is important that governments try to focus this action on the most vulnerable households and businesses as possible,” he said.

Higher costs come as borrowing costs rise.

The European Central Bank raised its rates for the first time in more than a decade in July to combat runaway inflation, fueled by rising energy prices.

The yield on 10-year French sovereign bonds hit an eight-year high of 2.5 percent on Tuesday, while Germany now pays 1.8 percent after boasting negative rates earlier in the year.

Rates charged in Italy have quadrupled from one percent earlier this year to four percent now, reviving the specter of the debt crisis that threatened the eurozone a decade ago.

“It is critical to avoid a debt crisis that could have major destabilizing effects and put the EU itself at risk,” the International Monetary Fund warned in a recent blog, calling for reforms to budget rules.

The EU has suspended until 2023 rules that limit countries’ public deficits to three percent of GDP and debt to 60 percent.

The European Commission plans next month to present proposals to reform the 27-nation bloc’s budget rules, which have collapsed due to the crisis.



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