The German government has announced a gas price cap to protect consumers from soaring energy bills resulting from the fallout of Russia’s war in Ukraine. The three-party coalition consisting of  the centre-left Social Democrats (SPD), the Greens and pro-business Free Democrats (FDP)  is planning a subsidy package worth between 150 and 200 billion euros. The fund is to be repurposed from the Economic Stabilisation Fund (ESF), which was originally set up to cushion the impact of the coronavirus pandemic on the economy. The German government will devise measures to shore up the finances of gas importers that are struggling to pay for energy that is no longer being provided by Russia. German Chancellor, Olaf Scholz, described these measures to secure the country’s energy supply and a cap on the price of gas as a “double whammy” to propel Germany through the energy crisis.

A “double whammy” that has sparked criticism as other EU countries might not have the means to fund similar measures.

Criticism from other member states

The first fierce reaction came from Rome. “Faced with the common threats of our times, we cannot be divided according to national budgets,” said the Italian prime minister, Mario Draghi, in a thinly veiled criticism of Berlin’s announcements, calling on Europeans to “show unity.”

The Slovenian government said it closely monitors and analyzes all measures of countries that are Slovenia’s economic partners, and on this basis adopts its own measures to help the economy. Given that Germany is Slovenia’s main foreign trade partner, the economic measures taken by the German government are also of great importance to the stability of Slovenian companies that have links with the German market (e.g. the car industry and other sectors), the Government Communication Office stressed in a written statement to the STA on October 5.

On October 3, finance ministers also sent messages about the need for the bloc to act together. Belgian Finance Minister Vincent Van Peteghem said: “The European project is built on solidarity, is built on working together, on coordination.” French Economy Minister Bruno Le Maire called for more targeted support and a better alignment of measures taken by national governments to avoid a “fragmentation of the euro area.”

Every EU member state has the right to adopt measures in line with its fiscal possibilities and needs, but in doing so the integrity of the single market should be taken into account, Croatian Finance Minister Marko Primorac said in Luxembourg on October 4. 

Germany’s finance minister defends the measures

“We are not stimulating the economy, what we are doing is softening the blow of ruinous price peaks,” German Finance Minister Christian Lindner said on October 3. The aid package would be proportionate to the size of the German economy, Lindner said, describing it as a “protective shield.”

EU Commission is “vigilant”

The German measures have opened up discussions concerning their impact on the European internal market. “The Commission will be vigilant about the impact of this (Berlin) initiative on the conditions of fair competition,” the European Commissioner for the Internal Market, Thierry Breton, said in an response to AFP on September 30.

Speaking to EFE on October 5, the European Union’s High Representative for Foreign Affairs, Josep Borrell, also warned that the German measures could “generate a problem of cohesion in the European internal market.” Borrell added, “we have to maintain the functioning of the internal market and avoid distortions of competition, without a doubt.”

Is a price cap the answer?

Germany is one of the main opponents of capping wholesale gas prices, which is being advocated by more than half of EU member states. Germany’s Minister for Economic Affairs Robert Habeck warned on September 30 of supply bottlenecks if an EU-wide price cap on gas was introduced. “That is why we need another solution, a better solution.” Germany and the Netherlands are among those opposed to the majority of EU states calling for a cap on the price of gas, both for wholesale and for imports. Italy, France, Spain, and Belgium have all endorsed a cap.

European Commission President Ursula von der Leyen joined in on the debate October 5. Temporarily capping the price of gas – along with negotiating prices with gas suppliers and joint purchases – should bring down energy prices in the European Union, the President said.  

“Introducing a cap on gas overall is a temporary solution” and should be “designed properly to ensure security of supply,” von der Leyen said at the European Parliament in Strasbourg, France.

As a first step, the price of gas used to generate electricity could be capped, von der Leyen said. “But I think we also have to have a look at gas prices beyond the electricity market.”

Limiting gas prices should help in reducing price volatility, she noted, without providing additional details on the design of the proposed price caps.

New joint debts?

The Commissioner for the Economy, Paolo Gentiloni, suggested on October 4 the creation of a new common fund financed by joint debt instruments aimed at accelerating the energy transition and avoiding “fragmentation” between member states of the bloc in their responses to the crisis.
“If we want to avoid fragmentation, if we want to tackle this crisis, we need a higher level of solidarity and to implement common tools,” he said upon his arrival at the meeting of EU finance ministers in Luxembourg.
In particular, the EU Economy Commissioner proposed taking inspiration from the 100 billion common fund against unemployment that the bloc created at the beginning of the coronavirus pandemic, dubbed SURE, whose aid is channeled to EU partners in the form of loans.
However, the European Commission’s Vice-President, Valdis Dombrovskis, limited himself to pointing out the “divergences” that exist between member states when asked about the suggestion of his two colleagues. Gentiloni and Breton launched the joint debt proposal on October 3.

The German Finance Minister, Christian Lindner, said that his country is in favor of measures at a European level such as joint energy purchases or making changes to the gas market, but considered that “the instruments that were put in place during the pandemic cannot be transferred one-to-one to a supply shock and inflation scenario.”  
This crisis, the politician from the liberal Free Democrats said, is “different from that of the pandemic” because it is not caused by a problem of demand, but of supply.

Now it’s up to the heads of state

On October 7 the heads of state of the 27 EU member states are meeting for an informal summit in Prague. It is likely that the issue of capping gas prices will be discussed by the heads of state. European Commission President von der Leyen sent a letter to the EU leaders beforehand mapping out a “roadmap” on how to tackle the energy crisis.

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