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Germany’s gas-price ‘defence shield’: problems and redeeming features

The €200 billion “defence shield” risks undermining European solidarity. This could be avoided by designing it well.

Publishing date
30 September 2022
Olaf Scholz

On 29 September, Germany announced a €200 billion “economic defence shield”, or set of measures to tackle rising gas prices. Three things are new about the package.

First, it involves a much larger fiscal commitment than previously (a German package announced on 7 September amounted to €65 billion, mostly financed through levies, not new borrowing).

Second, a new support measure, named the ‘gas price brake’, is intended to reduce average gas prices. This was mentioned in the previous package, but details are now to be fast-tracked, by end-October. According to preliminary estimates, the measure would cost between €15-€24 billion if applied to private households only.

Third, a plan to introduce a levy on all gas consumption of €0.027 per kilowatt hour as of 1 October has been scrapped as no longer needed”, in the words of Chancellor Olaf Scholz. Support for struggling importers that lost contracts with Gazprom will instead come from the new fund.

Germany’s approach brings with it problems. First, there is a lack of European coordination. German finance minister Christian Lindner said “Germany is using its economic firepower in this energy war”. However, Europe is fighting the energy war together; ensuring unity is maintained is of paramount importance to defeat Putin’s energy blackmail. Germany appears to be flexing its fiscal muscles to subsidise gas consumption in Germany, driving up prices and hurting its neighbours. This is upsetting other European countries that have long pushed for a European solution to the problem of skyrocketing gas prices. From a European perspective, the timing of the announcement, a day before an important meeting of EU energy ministers tasked with agreeing on European emergency interventions in energy markets, was particularly unfortunate.

Second, the package would circumvent German fiscal rules. The German debt brake is currently suspended, but the government has committed to applying it next year. Since it will be impossible to finance the new support package within the debt brake’s federal deficit limit of 0.35% of GDP, next year’s deficit will in effect need to be financed through large-scale borrowing today (something the German constitution allows in emergencies) – creative accounting of the sort typically avoided by Germany.

Redeeming features

But there are two elements that offset the potential negative impact. First, the gas price brake is very unlikely to take the form of a generalised price cap. While the details are still unclear, it is meant to be analogous to the current electricity price brake, which subsidises electricity units only up to a maximum consumption level, calculated as the consumption of a frugal household. Beyond this, high prices apply. If the gas price brake is designed in the same way, it could incentivise gas savings, rather than additional consumption. This seems to be the intention – the German government’s announcement referred many times to the need to save gas. In that case, the measure would be fully aligned with the EU emergency measures agreed by the EU energy ministers on 30 September.

Second, the €200 billion is likely much higher than the support measures the package is meant to finance, for two reasons. First, the €200 billion partly replaces a previously announced €34 billion gas levy. Second, part of the €200 billion is only precautionary: it is meant to pay for potential future needs that are not yet specified. These would normally have been covered simply by borrowing next year. But the government has promised not to do that (in the form of a commitment to reinstate the debt brake). As a result it needs to borrow now.

To conclude, the package certainly sends the wrong signal: Germany using its fiscal power in a way that could hurt other European countries. But it does not entail immediate spending of €200 billion to shield German families and businesses from higher energy prices. Rather a bazooka has been created in response to a German oddity: the decision to effectively suspend new net borrowing next year. Depending on how the gas brake is designed, German gas consumption may not actually go up, but may even go down.

The main risk is that the package will disrupt the European level playing field. In the absence of a common fiscal response, governments with more fiscal space inevitably do better in managing crises. If this is done in a way that has positive spillovers onto other EU countries, it may be acceptable. But if the German gas price brake gives German business a much better chance to survive the crisis than, say, Italian business, economic divergences in the EU could be deepened, and European unity on Russia undermined.

 

About the authors

  • Simone Tagliapietra

    Simone Tagliapietra is a Senior fellow at Bruegel. He is also Adjunct professor of Energy, Climate and Environmental Policy at the Università Cattolica del Sacro Cuore and at The Johns Hopkins University - School of Advanced International Studies (SAIS) Europe.

    His research focuses on the European Union climate and energy policy and on the political economy of global decarbonisation. With a record of numerous policy and scientific publications, he is the author of Global Energy Fundamentals (Cambridge University Press, 2020), L’Energia del Mondo (Il Mulino, 2020) and Energy Relations in the Euro-Mediterranean (Palgrave, 2017).

    His columns and policy work are published and cited in leading international media such as the Financial Times, The New York Times, The Guardian, The Wall Street Journal, Le Monde, Die Zeit, Corriere della Sera, Il Sole 24 Ore and others.

    Simone holds a PhD in Institutions and Policies from Università Cattolica del Sacro Cuore. Born in the Dolomites in 1988, he speaks Italian, English and French.

  • Georg Zachmann

    Georg Zachmann is a Senior Fellow at Bruegel, where he has worked since 2009 on energy and climate policy. His work focuses on regional and distributional impacts of decarbonisation, the analysis and design of carbon, gas and electricity markets, and EU energy and climate policies. Previously, he worked at the German Ministry of Finance, the German Institute for Economic Research in Berlin, the energy think tank LARSEN in Paris, and the policy consultancy Berlin Economics.

  • Jeromin Zettelmeyer

    Jeromin Zettelmeyer has been Director of Bruegel since September 2022. Born in Madrid in 1964, Jeromin was previously a Deputy Director of the Strategy and Policy Review Department of the International Monetary Fund (IMF). Prior to that, he was Dennis Weatherstone Senior Fellow (2019) and Senior Fellow (2016-19) at the Peterson Institute for International Economics, Director-General for Economic Policy at the German Federal Ministry for Economic Affairs and Energy (2014-16); Director of Research and Deputy Chief Economist at the European Bank for Reconstruction and Development (2008-2014), and an IMF staff member, where he worked in the Research, Western Hemisphere, and European II Departments (1994-2008).

    Jeromin holds a Ph.D. in economics from MIT (1995) and an economics degree from the University of Bonn (1990). He is a Research Fellow in the International Macroeconomics Programme of the Centre for Economic Policy Research (CEPR), and a member of the CEPR’s Research and Policy Network on European economic architecture, which he helped found. He is also a member of CESIfo. He has published widely on topics including financial crises, sovereign debt, economic growth, transition to market, and Europe’s monetary union. His recent research interests include EMU economic architecture, sovereign debt, debt and climate, and the return of economic nationalism in advanced and emerging market countries.    

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