June 7, 2023

Germany tops spending list due to heavy reliance on Russian gas supplies
Germany tops spending list due to heavy reliance on Russian gas supplies

Almost every week now, European governments are announcing emergency measures to protect households and businesses from an energy crisis triggered by Russia’s war in Ukraine.

Since Russia invaded its pro-Western neighbor in late February, hundreds of billions of euros have been spent so far and counting.

Governments have gone all out: from capping gas and electricity prices to saving struggling energy companies and providing direct assistance to households to fill their cars.

Public spending has continued even as EU countries have amassed large amounts of new debt to save their economies from the impact of the 2020 coronavirus pandemic.

But some leaders are proud of using public funds to tackle the new crisis, which has sent inflation soaring, the cost of living higher and sparked fears of a recession.

After announcing 14 billion euros ($13.9 billion) of new measures last week, Italian Prime Minister Mario Draghi boasted that it would make Italy “one of the top spenders in Europe”.

The Bruegel Institute, a Brussels-based think tank that tracks EU government spending in the energy crisis, ranks Italy as Europe’s second-biggest spender after Germany.

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

Germany topped the list with 100.2 billion euros, or 2.8 times its GDP, as the country relies heavily on gas supplies from Russia, which it has cut in retaliation for war-related sanctions on Moscow.

On Wednesday, Germany announced it would nationalize troubled gas giant Uniper.

France, which protected consumers from rising gas and electricity prices as early as November, has so far allocated 53.6 billion euros, or 2.2 percent of GDP, in third place.

Since September 2021, EU countries have now provided 314 billion euros, Bruegel said.

“The number will increase as energy prices continue to rise,” Bruegel senior researcher Simone Tagliapietra told AFP.

The energy bill for a typical European household could hit 500 euros a month early next year, compared with 160 euros in 2021, according to U.S. investment bank Goldman Sachs.

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

But the spending came after a rise in public debt, which stood at 189% of GDP in Greece in the first quarter, 153% in Italy, 127% in Portugal, 118% in Spain and 114% in France in the first quarter.

“Originally designed as a temporary response to what was supposed to be a temporary problem, these measures have ballooned and become structural,” said Thaliapitra.

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

As borrowing costs rise, spending rises.

In July, the European Central Bank raised interest rates for the first time in more than a decade to combat runaway inflation caused by soaring energy prices.

The 10-year French sovereign bond yield hit an eight-year high of 2.5 percent on Tuesday, while Germany now pays 1.8 percent after announcing negative rates at the start of the year.

The interest rate charged to Italy has quadrupled to 4% from 1% earlier this year, resurfacing the specter of the debt crisis that threatened the euro zone a decade ago.

“It is crucial to avoid a debt crisis that could have huge destabilizing effects and put the EU itself at risk,” the IMF warned in a recent blog calling for reform of budget rules.

The European Union has suspended rules to cap national public deficits at 3 percent of GDP and debt at 60 percent until 2023.

The European Commission plans to present proposals next month to reform budget rules in the bloc’s 27 countries, which have been undermined by the crisis.

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