Concerned about the impact of inflationary pressures on the purchasing power of European citizens, the EU27 leaders discussed, on Friday 24 June, various ways in which the rise in energy prices could be mitigated at European level. The possibility of developing new budgetary instruments to relieve Member States from tighter financing conditions and/or to facilitate investments in energy transitions was also discussed.
Although growth will be achieved in 2022 and 2023, the Russian invasion of Ukraine has a “heavy impact” on economic activity and inflation. In addition, rising energy prices, exacerbated by “Russia’s disruptive action on gas markets”, are contributing to rising food prices, said European Commission President Ursula von der Leyen. This is why, she added, “we discussed how to mitigate the economic and social impacts” of such a macroeconomic situation, especially on the most vulnerable groups.
As Russian gas supplies to EU countries continue to be cut, the Commission is working on “a common European emergency demand reduction plan”, which will be presented to the leaders of the 27 Member States in July, said Ms von der Leyen. Developed in consultation with Member States and industry, the plan will aim to strengthen the EU’s ability to “cope with possible further disruptions of Russian gas supplies to Europe”, she said.
The aim is also to avoid fragmentation of the EU countries, the former German minister said, taking as an example the EU’s coordinated action to combat Covid-19. Ms von der Leyen also said that the Commission had examined all national contingency plans to ensure that each Member State was prepared for further disruption, especially in view of the coming winter.
The day before, the Commission’s Executive Vice-President in charge of the European Green Deal, Frans Timmermans, had indicated that twelve Member States were now affected by Russia’s unilateral supply cuts. Ten EU countries have issued an early warning under the Security of Gas Supply Regulation. Among them is Germany, whose government has triggered phase 2 of its three-stage emergency plan (see EUROPE 12978/11).
In its conclusions, the European Council calls on the Commission to “pursue its efforts as a matter of urgency with a view to securing energy supply at affordable prices”, as well as to “take any appropriate measures to ensure closer energy coordination between Member States”.
For the Portuguese Prime Minister, António Costa, the EU should focus both on accelerating the transition to new forms of energy production and on strengthening joint purchasing mechanisms, interconnections and collaborative energy logistics mechanisms to ensure that the countries most dependent on Russian oil and gas have alternative sources as soon as possible.
Flows must go “in all directions”, said Ms von der Leyen.
German Chancellor Olaf Scholz said he was “firmly convinced” that the EU was on the right track in coordinating energy measures, citing the voluntary joint procurement platform as an example. French President Emmanuel Macron has called for “a European strategy of diversification, of accelerating the energy transition”, both for gas and electricity.
The idea of decoupling gas prices is gaining ground
Ms von der Leyen also announced that the EU27 will discuss the functioning of the EU electricity market at the October European Council.
To this end, the Commission is invited to “work on alternative market designs that would potentially include the decoupling of the gas from the formation of the market price”, she said. And she added: “We are working on different models, not only to look in how to curb the energy prices or electricity prices but also to look at the market design with the question: is the market design we have today still fit for purpose?”.
This is a small step forward for Spain, France, Portugal and Italy. These countries have been lobbying for months for a revision of the EU electricity market to decouple the price of electricity from that of gas. Such a reform would also take into account the growing role of renewable energies in the energy mix.
“We got the European Council to invite the Commission to carry out a full study on price controls and also on the reform of the electricity market”, said Italian Prime Minister Mario Draghi. According to him, the results of this analysis will be presented “in September”. He had tested with his counterparts, but without success, the idea of an extraordinary summit in July to discuss the European response to support household purchasing power.
While Mr Costa acknowledged that not all Member States are in favour of decoupling, the Italian Prime Minister pointed out that the position of Germany and the Netherlands is changing on electricity market reform.
Their Spanish counterpart, Pedro Sánchez, argued not only for decoupling but also for the introduction of a cap on gas prices at EU level, praising the results of the cap put in place in the Iberian Peninsula (see EUROPE 12968/4). Belgian Prime Minister Alexander de Croo has also spoken out in favour of a price cap.
On this aspect of rising energy prices, the European Council conclusions once again invite the Commission to study ways of curbing this inflation, “including the feasibility of introducing temporary import price caps where appropriate”.
New European budgetary tool?
Faced with an economic downturn and tighter financing conditions, Member States are looking for the best way to protect citizens from a highly uncertain economic situation without adding too much to their public debt.
The idea of setting up an emergency budgetary instrument was discussed, said Mr Draghi, who advocates building on the positive experience of the SURE instrument for short-time work. He confirmed the “resistance of the frugal countries” on this issue. But, he argued, the Commission simply needed to have “the capacity to access the markets autonomously”, as this “joint budgetary capacity” would be enough to demonstrate to the markets the solidarity between Member States and would help to lower the interest rate spreads between the debts of the euro area countries.
The European Central Bank will present on Thursday 21 July an ‘anti-fragmentation’ tool for the euro area to counteract the recent tensions in sovereign debt markets (see EUROPE 12972/22).
The pooling of budgetary resources is not to the liking of countries such as the Netherlands and Sweden, which are in favour of first using the resources already available, such as the ‘loans’ component of the Next Generation EU Recovery Plan (see EUROPE 12978/9), in particular to speed up the energy transition.
Swedish Prime Minister Magdalena Andersson warned against taking the easy way out. “Pouring more money into citizens’ pockets” when energy prices are soaring due to reduced supplies from Russia “will not solve the problem” but will fuel the inflationary spiral, she said.
See the European Council conclusions: https://aeur.eu/f/2bk (Original version in French by Damien Genicot and Mathieu Bion with the editorial staff)