In 2020, as demand for liquefied natural gas increased in Asia, the shippable fuel was an afterthought in Europe. But when Russia’s invasion of Ukraine in February 2022 threatened the continent’s energy supply, Europe panicked and spent the intervening year loading up on gas.
Now, a mild fall and mild winter plus curbing demand have made it likely that the continent will spend the coming months with economic trouble but not a full-blown energy crisis. Europe entered December having outbid Asian buyers for LNG cargoes and with abundant gas stocks. Amazingly, manufacturing output – once expected to be the first casualty of energy shortages – has risen. Running hot industrial production and replacing gas will help move the continent to a more energy independent path in the long term.
But not long ago, the prospect of rationing and regional breaks had German officials quaking in their boots. The energy crisis has thrown grenades into the EU’s battles over state aid and its restrictive fiscal rules. Over the past six months, European countries have nationalized services, plowed money into green investments, and taxed the windfall profits of energy companies. Policies such as price ceilings, which the bien-pensants raised months earlier, are on the brink of state policy.
Many of the moves are temporary – hastily developed and justified as emergency measures – but they set precedents that are considered legitimate for them. More and more frequent crises in the material world can open new political paths.
A place for the periphery
Nowhere is this dynamic more evident than in Europe’s problem child: Greece. Through November this year, Athens spent 5.7% of GDP, or more than €10 billion, to protect households and businesses from rising energy prices. This puts it close, as a share of GDP, to Germany’s unrivaled 7.4% spent on subsidies.
In light of the fresh wound of the bond crisis – when the European Union Commission, the European Central Bank and the IMF forced Greece to run a primary surplus for years amid 50% youth unemployment – such a cushion for ordinary households facing a spike in the cost of living is no less. Unusual. The government, facing an election year in 2023, pledged over the summer to absorb more than 90% of the increase in electricity bills for households, and roughly for farmers and small businesses. In November, it imposed a 90% tax rate on energy companies’ windfall profits. If fiscal austerity was the story of the euro crisis, the energy crisis has met with a more socially sensible policy response. While spending for energy users does not yet signal a decisive shift towards fiscal expansion – the subsidy money was drawn from the EU’s Next Generation Funding – the sheer size of the expenditure is significant .
Last summer, facing sweltering heat and growing anxiety over low gas supplies for the coming winter, France announced it would spend $10 billion to nationalize the utility Electricité de France (EDF). In a statement from the Ministry of Finance (presented by Goldman Sachs and Societe Generale), the French government explained that the move would allow it to “commit to long-term projects that sometimes do not coincide with the shorter-term expectations of private investors, without being exposed to the volatility of the stock markets.” .
Whether securing the roughly 14% stake in EDF that the government did not already own makes a material difference to France’s energy sovereignty, the move is in line with a host of other nations. In Italy, Prime Minister Giorgia Maloney just passed emergency legislation that makes it easier for the government to take over key energy infrastructure like power plants and pipelines.
The largest of these nationalizations is in Germany, where the government now controls the gas company Unifer after a 15 billion euro bailout package proved insufficient. Berlin had to change its domestic laws to allow nationalization and took a 99% ownership stake in the too-big-to-fail company that went bankrupt after its failed Nord Stream 2 bet.
“There may be more to it,” European Investment Bank President Werner Heuer told Bloomberg, “because in light of incredibly high energy prices that cannot be passed on to consumers, countries have to step in.”
Rules for you but not for me
Germany sees the monster it has unleashed with this extraordinary policy, and is now trying to rein it in. After committing to an energy package of 200 billion euros for its citizens, backed in part by new loans, the country now insists that it will oppose another joint debt issue by the European Union, or any relaxation of the fiscal rules that would allow other countries to raise debt. This is beyond loud calls from other member states, the European Commission and even the International Monetary Fund for more joint debt issuance.
Strict constitutional rule prevents Berlin from running a budget deficit. This is the so-called Schuldenbremse, or debt brake, which the Germans bypassed in 2020 by declaring a state of emergency. Now, the German finance ministry is rejecting the French push for a low fuel price cap, arguing that without a freely moving price signal, Europe will offer a low price to Asian buyers. Joining Germany’s bid to let prices rip is Europe’s largest gas supplier, Norway, which has been raking in the highest ever hydrocarbon revenues out of the pockets of other Europeans.
Societies boil over when the price of essentials like energy and food soars. Politicians are afraid of being hit again and are now putting money into the voters’ pockets. But inflation has already taken its toll on those in office – Macron’s party was not capable to win a legislative majority in parliament, and only a third of the French are willing to continue bearing the economic costs of the war. Mario Draghi, the key champion in escalating the sanctions, warned that inflation “could swallow the commitment of our countries towards Ukraine”. Indeed, Draghi lost the Italian presidency and was replaced by the far-right Meloni. After maneuvering in Germany’s state elections, the liberal FDP, uncomfortable with the SPD and the Greens’ meddling, vowed to stop “left-wing projects [from] implemented in this coalition.”
Will the current state of emergency come to an end? We are entering an era in which the European Union will be battered by repeated shocks and social upheavals. There are worse things in a democracy than politicians working to save their own skins. Europe’s austerity and free market wing approved massive fiscal intervention amid pandemic and war, but these moves set a precedent for governments to take active responsibility in future crises.
“Europe will be created in a crisis, and will be the sum of the solutions adopted for these crises,” said the father of the founder of the European Union, Jean Monnet. Polychrisis is not just one thing. It’s one thing after another. The Europeans are already preparing to compete with the latest escalation of the protectionist policies of the United States. Facing a potentially vicious winter in 2024, “sovereign Europe” seems to be on the agenda. As fundamental crises pile on top of each other, abnormal policies will follow.
Polycrisis is a publication focused on macroeconomics, energy security and geopolitics.