October 6, 2022

Germany tops the consumption list, which has been hit hard by its heavy reliance on Russian gas supplies
Germany tops the consumption list, which has been hit hard by its heavy reliance on Russian gas supplies

Almost every week, European governments announce 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 — have so far been paid out since Russia attacked its pro-Western neighbor in late February.

Governments have done everything they can: from capping gas and electricity prices to bailing out struggling energy companies and providing direct assistance to households to charge their cars.

Public spending has continued even though European Union countries have already racked up a mountain of new debt to save their economies from the effects of the 2020 Covid pandemic.

But some leaders have prided themselves on using the public purse to fight this new crisis, which has fueled inflation, raised the cost of living and sparked 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 made Italy “among the top spenders 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.

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

Germany tops the list with 100.2 billion euros, or 2.8 of its GDP, as the country is hit hard by its heavy reliance on Russian gas supplies, which have dwindled due to suspected retaliation from Western sanctions against Moscow over the war.

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

France, which protected consumers from rising gas and electricity prices back in November, is in third place with 53.6 billion euros allocated so far, which represents 2.2 percent of GDP.

EU countries have so far invested €314 billion as of September 2021, according to Bruegel.

“This number will increase as energy prices continue to rise,” Simone Tagliapietra, a senior fellow at Bruegel, told AFP.

The energy bills of a typical European family could reach 500 euros a month early next year, compared to 160 euros in 2021, according to US investment bank Goldman Sachs.

Measures to help consumers ranged from a special tax on excess profits in Italy to a freeze on energy prices in France and public transport subsidies in Germany.

But the spending followed a response to the pandemic that pushed up public debt, which in the first quarter was 189 percent of Greek GDP, 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 grew and became structural,” Tagliapietra said.

“This is clearly not sustainable from a public finance perspective. It is important that governments make an effort to focus this action as much as possible on the most vulnerable households and businesses,” he said.

Higher spending comes as borrowing costs rise.

The European Central Bank raised its interest rate for the first time in more than a decade in July to fight low inflation, fueled by rising energy prices.

The yield on 10-year French government bonds hit an eight-year high of 2.5 percent on Tuesday, while Germany now pays interest at 1.8 percent after boasting a negative rate at the start of the year.

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

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

Until 2023, the EU suspended the rules that limit the public deficit of countries to three percent of GDP, and the debt to 60 percent.

Next month, the European Commission plans to present proposals to reform the budget rules of the 27-member bloc, which have been shattered by the crisis.

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