Mint explainer: Germany’s mega subsidy scheme that puts EU unity at risk

What is the context?

Europe is in the midst of a major energy crisis. Economies reopened as the COVID-19 pandemic faded and increased energy demand. This was heightened by tensions over Russia’s invasion of Ukraine. Moscow has been a major supplier of natural gas to Europe, particularly Germany, and has used its leverage to progressively reduce significant gas flows to the continent. These two factors have created uncertainty in the markets and the price of energy has skyrocketed. In just one year, the price of benchmark European gas has risen by 550 percent, with big consequences for households. For example, the United Kingdom saw a 54% increase in household bills in April, as well as an 80% increase in October. As economies have been battered, leaders have called for a joint European response to the crisis.

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What is Germany’s plan?

Europe’s largest economy has suffered greatly due to the energy crisis. Experts have predicted that the country could enter a recession if the energy situation does not improve. Inflation in the country has also reached the highest level of 70 years and has reached double digits.

The 200 billion euro program is meant to act as a safeguard and will be financed largely through borrowings by the government. It will consider capping gas and electricity prices in the country to keep industries running and homes warm as winter approaches. Government resources will be used to compensate gas suppliers for selling energy at lower rates.

Why is Europe up in arms?

To begin with, other European nations fear the prospect of a ‘subsidy war’. Even if industries suffer in other countries, Germany’s plan will allow its businesses a competitive advantage because they can buy energy at lower prices. Analysts and political leaders fear that other economies will have to take similar steps and regulate overly expensive national industrial subsidy programs to match Germany’s. Poor European states realize they cannot match Berlin’s massive aid program and will drop out. Slovakia’s energy minister accused Berlin of “disrupting our common market”.

Germany has also been accused of breaching a common response to the energy crisis. While the continent was able to agree partial measures such as a price cap on non-gas electricity prices, Berlin has opposed a cap on the price of gas supply. Its latest plans further complicate efforts to present a united European front. “We cannot divide ourselves by space in our national budget,” said outgoing Italian Prime Minister Mario Draghi.

What has been the response from Berlin?

German politicians have been defiant. Chancellor Olaf Scholz has fully supported the program, calling it a “very balanced, very smart, very decisive package that works to keep prices down”. German leaders also pointed to an energy package passed by France that has similar energy relief targets. Economy Minister Robert Habeck said Germany was “doing what other countries have done long ago”. The country’s politicians have yet to explain the timing of their program which was released without consultation with other EU members.

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