The EU's Plan to Solve the Energy Crisis
But also — ECB, SGP, Taxes, WTO, State Aid
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Extraordinary Energy Council in Brussels
EU energy ministers met in Brussels on Friday 9 September for an extraordinary meeting on the energy crisis. Across two distinct meetings, energy ministers formulated policy options that could help mitigate soaring energy prices in a short timeframe.
BACKGROUND • As households, industries and businesses face increasing pressure amid soaring energy prices, the EU held an emergency meeting to define a direction for a legislative proposal set to relieve pressure on energy markets ahead of winter, and mitigate fears of social unrest.
Recent developments in the eurozone's financial conditions pulled energy markets down sharply for the best part of last week. Energy futures traded in the red as margin calls for the sector might reach 1,5 trillion euros, spreading fears of a “Lehman moments” among traders. This liquidity crunch was yet another blow to market resilience, pushing for further intervention beyond what EU Member States pledged so far.
Initiatives arose on a daily basis ahead of this emergency meeting, with a varying likelihood of passing through the discussion phase. Poland proposed to freeze the European Union Allowance price at €32/ton to protect industries and power generators from soaring costs. Stakeholders also set forward a sell-off plan of EUA from the Market Stability Reserve, a tool whose role is to stabilise the carbon price, a measure that could help finance fiscal policies to solve the crisis.
WHAT MEASURES? • First, energy ministers requested that the Commission set a revenue ceiling for infrastructure electricity producers with low production costs, those that benefit from the marginal pricing system. A solidarity contribution from fossil fuel firms was another idea put up by ministers as a way to lessen the burden of high energy costs on consumers, businesses, and homes.
The second suggestion was to put emergency and short-term measures in place, such as a restriction on gas prices. Limiting the effect of high gas prices on EU power markets and consumer energy prices should also be made possible by specific measures in this regard.
Thirdly, ministers requested that the European Commission make a proposal that would encourage coordination among EU countries to reduce electricity usage. The goal is to reduce the strain on electricity production and address energy scarcity as well as high energy prices.
Finally, the ministers requested the creation of emergency liquidity instruments to handle the increasing volatility in futures markets, guarantee that market players have access to enough collateral to meet margin calls, and maybe amend pertinent regulations to incorporate safeguards. According to Equinor, margin calls on the energy market increased to 1,5 trillion euros.
CONSEQUENCES • With a mildly defined timeframe — Czech industry minister Jozef Sikela outlining four likely measures that will be implemented "before the end of the month" — the meeting ended on an intermediary note. Further details are set to be discussed on 13 September and released on the 14th as President Ursula Von der Leyen delivers her State of the European Union address. The president of the Commission asked for "immediate action" in the energy market, and must carry it out this week.
If the meeting of the energy ministers last week is any indicator, it will be difficult to find specific policies that everyone will embrace. More than half of the nations proposed a ceiling on Russian gas price, a proposal for which Friday’s meeting failed to provide any concrete answer. However, the proposal currently in the pipeline is set to face a fast-track decision making process which won’t require either a unanimous vote or parliament’s counterseeing to go forward.
In Case You Missed It
FRANKFURT HIKE • The ECB's Governing Council decided on 8 September to raise the three key ECB interest rates by 75 basis points (+0,75%). With this higher than expected rate hike, the ECB signals its willingness to fight inflation and despite a worsening economic outlook in the eurozone. As of 14 September, the three key ECB interest rates will be at 0,75% (deposit facility), 1,25% (main refinancing operations), and 1,50% (marginal lending facility).
The ECB also decided to maintain liquidity high on the market - despite the theoretically opposed effect it has on inflation — and intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the Asset Purchase Program.
CORPORATE TAX • Hungary decided to veto the EU’s signing of an OECD-sponsored deal that would introduce a 15% minimum tax rate for multinational companies. Several EU Member States, including France, Germain, Spain, Italy, and the Netherlands announced at an ECOFIN meeting in Prague on 9 September they will implement the deal with or without Hungary, via enhanced cooperation. The European Commission intended to get Member States onboard by agreeing on a directive, which required unanimity given it concerns tax matters.
SGP • The debate on the future of the Stability and Growth Pact (SGP), the block’s debt-and-deficit rulebook, has been postponed due to the pandemic and the war in Ukraine. The talks are going forward, and the European Commission’s Valdis Dombrovskis said in Prague the reform of the SGP could be complete by the end of 2023.
STATE AID • The EU’s top competition official, Margrethe Vestager, told the FT that the European Commission would start consultations with Member States that could lead to a prolongation of the EU’s Covid-19 era suspension of state aid rules in the energy sector. The move would help cushion the costs of the energy crisis.
EU vs US • The US’s 437 billion dollar Inflation Reduction Act is under scrutiny from the European Commission. Officials at DG Trade are investigating whether certain requirements in Biden’s flagship legislation could violate WTO rules, namely provisions favouring made in USA products.
What we’ve been reading this week
DG Trade’s Sabine Weyand spoke to the Financial Times in a wide-ranging interview that touches upon protectionism, sanctions, and Brexit.
In a report published by Bruegel, Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra and Georg Zachmann put forward a plan to address the energy crisis, founded on a commitment by all member states to maintain cross-border flows and reduce demand, while protecting the most at-risk populations.
Guest columnist of the Institut Montaigne Chandran Nair warns Europen states of the dangers of clinging to Western-centric notions of geopolitics, which threaten to alienate them from a politically plural world ever less tolerant of Western domination.
Egmont Institute’s Sven Biscop brings to light the transformative potential of NATO’s New Force Model. By commiting alliance members to be able to put half a million soldiers on the battlefield within months, it makes the concept of European defence a little bit more tangible.
In Notes from Poland, Mateusz Piątkowski discusses the legal soundness of Poland’s claim that Germany still owes war reparations.
This week’s newsletter is brought to you by Gabriel Papeians Papeians de Morchoven, Maxence de La Rochère, Gautier Parthon de Von, and Augustin Bourleaud. See you next Tuesday!