The Gas Puzzle: EU in Troubled Waters
But also — AI, ECB, Golden Passports
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New Sanctions And Energy Measures, But a Missing Price Cap
Reacting to Putin’s latest provocations, the Commission announced an eighth package of sanctions set to undermine Russia’s finances in the war against Ukraine. Later that week, EU Energy ministers voted on a new set of measures to reduce the bloc’s energy bill, but almost no progress was made towards the much-debated wholesale price cap on gas.
SEASON 8 • The new package of sanctions follows from Putin’s recent nuclear threats and the announcement of partial mobilisation of Russians in the war against Ukraine. Last week, illegal annexations of Ukrainian territories, along with alleged sabotages of gas pipelines in the Baltic Sea, reinforced calls for new restrictive measures. “We are determined to make the Kremlin pay for this escalation”, Ursula Von Der Leyen said on Wednesday, before detailing the content of the eighth package.
SANCTIONS • New sanctions include an EU-wide ban on European individuals who hold positions on the board of Russian state-owned firms, new export bans on key military products, and an extended list of Russian goods banned from the European market – a measure that should deprive Russia of an additional €7 billions in revenues.
The key element of the package is the Commission’s first concrete step towards a price cap on seaborne Russian oil. The objective of this measure – which was put forward by the G7 – is to limit fossil fuel revenues that Russia can channel into the war effort, while maintaining stability on global energy markets. Von der Leyen announced that the legislative proposal would set the legal basis for the establishment of this price cap.
For a booster shot on the first 7 packages of sanctions, consult our previous editions of EU weekly: 1, 2, 3, 4, 5, 6, 7.
ENERGY COUNCIL • Two days after this announcement, EU Energy ministers met to discuss new measures to curb energy prices. As the council approached, 15 Member States (including France, Spain, Italy and Belgium) addressed a letter to Commissioner for Energy Kadri Simson asking her to propose a price cap on gas at the upcoming meeting. The letter, obtained by Politico, reads: “We acknowledge the efforts made by the Commission (...) but we have yet to tackle the most serious problem of all: the wholesale price of natural gas”.
WHY A PRICE CAP? • The European electricity market is a system of marginal pricing in which the wholesale price of electricity is determined by the last, most expensive energy source that produces electricity. As a result, gas often sets the price of electricity. Capping the wholesale price of gas would therefore contain energy bills.
NO CONSENSUS • However, the measure is far from being consensual, with countries such as Germany fiercely opposing the implementation of such a price cap. On Berlin’s side, the fear is that a lower price will increase electricity demand, which will in turn undermine efforts to save energy across the bloc. Germany also fears that lower prices will drive the supply of liquefied natural gas (LNG) away from Europe, at a time when the continent needs LNG the most. As a response, proponents of the cap call for a “dynamic price cap” that would remain slightly above what importers pay for LNG to avoid driving LNG producers towards other continents.
SOLIDARITY • Instead of a price cap, Germany is focused on lowering its energy bills through a €200 billion plan that will use fresh debt to shield consumers and companies from high energy prices. The measure – which was announced by Olaf Scholz on Thursday – is met with criticism by several countries that do not have the resources to implement similar measures. “We can’t divide ourselves according to our fiscal room for manoeuvre, we need solidarity,” Italy's outgoing Prime Minister Mario Draghi said on Thursday.
COMPLICATIONS • The Commission is also sceptical about a wholesale price cap. In a recent paper on the different options to curb gas prices, the EU executive warned about potential disruptions of fuel flows between EU Member States, arguing that a wholesale price cap would disturb the price signals that currently drive flows to countries that urgently need gas. Therefore, should a wholesale price cap be adopted, the Commission believes that a new entity that allocates scarce fuel between states would have to be created – which complicates the matter even further.
Instead, the Commission advocates for a price cap on Russian gas only, and is also ready to consider a price cap specifically on gas used for power generation – a cap similar to the one introduced by Spain and Portugal in May.
WHAT WAS DECIDED? • For all that, no wholesale price cap was discussed or agreed on at Friday’s Energy Council as the Commission remains reluctant to put forward a proposal. “We’re disappointed with the Commission’s non-proposal," Spain’s minister for the ecological transition said to Euronews. "The Commission is aware this is a sensitive topic and has not managed to find the space in which all countries can respond positively”, she added.
Instead, EU Energy ministers decided on three measures that include a 10% voluntary reduction of electricity consumption and a 5% mandatory reduction of electricity consumption in peak hours. A “windfall tax” for non-fossil fuel electricity producers who benefit from abnormally high energy prices was also adopted: for these producers, market revenues will be capped at 180 euros/MWh and Member States will collect additional revenues to shield consumers from high energy prices. Finally, a solidarity levy will partially capture surplus profits made by fossil fuels companies, and other measures will be adopted to protect SMEs from soaring energy prices.
WHAT NEXT? • The above-mentioned measures are temporary and will apply from 1 December 2022 to 31 December 2023. Regarding the wholesale price cap on gas, a Commission official told Politico that the EU executive would “deepen its analysis” if necessary – a sign that a wholesale price cap on gas will not be adopted anytime soon.
In Case You Missed It — AI, ECB, Golden Passports
NEW RULES FOR AI • On 28 September, the Commission published two legislative proposals aimed at strengthening the legal framework around the use of Artificial Intelligence. The AI Liability Directive seeks to ensure that consumers and businesses harmed by AI-based products are given adequate compensation: “The new rules will give victims of damage caused by AI systems an equal chance and access to a fair trial and redress”, Commissioner for Justice Didier Reynders commented. The proposal includes a “presumption of causality” and a “right of access to evidence”, both aimed at minimising and facilitating the victim’s requirement to demonstrate the responsibility of AI systems for the harm caused.
Artificial Intelligence has been a major concern for the Commission since the release of the European AI Strategy in 2018. For the EU, the challenge is to create a legal framework that will become the global standard – an ambition made explicit by MEPs in May 2022. Back in 2021, the Commission put forward the so-called Artificial Intelligence Act, a proposal described as the first-ever legal framework on AI, and which is still under discussion.
ECB HIKE AHEAD • The European Central Bank (ECB) is weighing in favour of a 0,75% (75 bps) rate hike at its next monetary policy meeting in October. Addressing the Atlantic Council on 28 September, ECB President Christine Lagarde stressed “we will do what we have to do, which is to continue hiking interest rates in the next several meetings”.
After the end of a protracted era of negative interest rates in the eurozone, the ECB’s governing council is now under pressure to raise rates to combat inflation rates now in the double digits. The ECB is in a delicate position, as its commitment to tackle inflation could damage an already weakened eurozone economy, battered by the energy crisis and a fledgling euro-dollar exchange rate — the single currency being at a 20-year low against the greenback. Germany just announced a 200 billion euro debt-financed package to reduce energy costs for businesses and households alike, which could help tame inflation.
The ECB is also trying to avert a bond market sell-off of weaker eurozone Member States, such as Italy, whose borrowing costs will soar as the EU’s monetary authority tries to tackle inflation. While the ECB’s Transmission Protection Instrument (TPI), unveiled on 21 July, is aimed at intervening in case of speculative sell-offs of bonds, this does not immunise the eurozone economy against the effects of the ongoing crises. One of the EU’s financial regulators, the European Systemic Risk Board, which is chaired by Christine Lagarde, issued an alert report on 22 September warning of “severe risks to financial stability”. As the FT noted, this is the first ESRB alert since the agency’s creation in 2010.
GOLDEN PASSPORTS • The European Commission has moved to take Malta to the Court of Justice of the European Union over its “golden passport” scheme which allows wealthy investors to buy Maltese – and therefore EU – citizenship. Since 2013, Malta has generated over €1.1 billion through the sale of passports to foreign nationals, without requiring them to live in the country. Investors have mostly come from the Gulf, Asia and Russia.
Announcing the decision, Commissioner for Justice Didier Reynders tweeted that “European Union values are not for sale”.
Fears over money-laundering and of citizenship being granted to high-risk individuals has long drawn the ire of the Commission. The dispute began in October 2020, when the Commission urged Malta to end the scheme in a letter of formal notice. The Commission sent an additional request for the scheme’s termination in June 2021, after the Maltese government introduced a new investor citizenship scheme at the end of 2020.
While the scheme was suspended for Russian and Belarusian nationals following Russia’s invasion of Ukraine, the Commission said that such schemes are considered incompatible with EU law. Malta continues to operate the scheme for all other nationalities and has not expressed any intention to end it, the Commission stated.
Similar schemes in Cyprus and Bulgaria have also drawn the attention of the EU executive, however, calls to end those schemes have been more successful. Cyprus processed its last applications in July 2021, while Bulgaria abolished the scheme in April 2022.
What we’ve been reading this week
Rejoice of Ukraine’s victories on the battlefield, but make preparations for a long war, warns Mark Leonard of the ECFR. Russia is readying for a war of attrition, and so should Europe.
EU states should welcome Russian deserters, writes Maarten den Heijer for the Verfassungsblog. He argues that under international law, the case for granting them asylum is strong.
This week’s newsletter is brought to you by Brían Ó’Donnaile, Maxence de La Rochère and Augustin Bourleaud See you next Tuesday!