December 8, 2022

Germany tops the spending list, having been hit hard by its heavy dependence on Russian gas supplies
Germany tops the spending list, having been hit hard by its heavy dependence on Russian gas supplies

Almost every week, European governments announce emergency measures to protect families and businesses from the energy crisis caused by the Russian war in Ukraine.

Hundreds of billions of euros have been spent – and the number is counting – so far since Russia’s invasion of its pro-Western neighbor in late February.

Governments have done their best: from setting gas and electricity prices to bailing out struggling energy companies and directing families to help fill their cars.

Public spending has continued even though EU countries have already accumulated mountains of new debt to rescue their economies from the fallout from the Covid pandemic in 2020.

But some leaders are proud of their use of public money to fight this new crisis, which has soared 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 this put Italy “among the countries that 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 largest spender in Europe after Germany.

Rome has allocated 59.2 billion euros since September 2021 to protect households and businesses from rising energy prices, which represents 3.3% of GDP.

Germany tops the list with €100.2 billion, or 2.8 of GDP, hit hard by its heavy dependence on Russian gas supplies, which has waned in a suspected response to Western sanctions against Moscow over the war.

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

France, which shielded consumers from rising gas and electricity prices in November, ranks third with 53.6 billion euros allocated so far, representing 2.2% of GDP.

EU countries have so far paid 314 billion euros since September 2021, according to Bruegel.

“This number is set to rise as energy prices continue to rise,” Simone Tagliabitra, a senior researcher at Bruegel told AFP.

Energy bills for 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 freezing energy prices in France and subsidizing public transport in Germany.

But the spending comes on the heels of a pandemic response that has led to an increase in public debt, which in the first quarter made up 189 percent of Greece’s GDP, 153 percent in Italy, 127 percent in Portugal, 118 percent in Spain, and 114 percent in France.

“These measures were initially designed as a temporary response to what was supposed to be a temporary problem, and they have swelled and become structural,” Tagliabitra said.

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

Higher spending comes with higher borrowing costs.

The European Central Bank raised its interest rate for the first time in more than a decade in July to combat hyperinflation, which is fueled by rising energy prices.

The yield on France’s 10-year sovereign bond reached an eight-year high of 2.5 per cent on Tuesday, while Germany is now paying 1.8 per cent interest after boasting a negative rate at the start of the year.

The rate imposed on Italy has quadrupled from one per cent earlier this year to four per cent now, resurrecting the specter of the debt crisis that threatened the eurozone a decade ago.

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

The European Union has suspended until 2023 rules limiting countries’ public deficits to three percent of GDP and debt to 60 percent.

The European Commission plans to present proposals next month to reform the budget rules of the 27-nation bloc, which has been shattered by crises.

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