EU warns against energy crisis turning into fiscal crisis - FT
Kyiv • UNN
Brussels urges governments to limit aid due to rising energy prices. Officials fear a new wave of inflation and rising national debt.
EU officials are urging the bloc's governments to avoid excessive support to compensate for rising energy prices, warning that the shock caused by the war with Iran could escalate into a fiscal crisis, UNN reports with reference to the Financial Times.
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The European Commission is insisting in discussions with EU member states that proposed energy subsidies, tax cuts, and price caps be limited in time and scope, according to sources familiar with the negotiations. Brussels aims to avoid a repeat of the 2022 energy crisis, which contributed to rampant inflation and growing deficits.
"This is a concerted effort by the European Commission," EU Energy Commissioner Dan Jørgensen told FT. "What happens in one sector of the economy can spread to the rest of society."
Several countries, including Italy, Poland, and Spain, have cut fuel taxes, while others have called on the EU to relax state aid rules. Rome is also pushing for Brussels to ease financial restrictions to give capitals more room for maneuver.
The European Commission has provided "technical advice and assistance to countries in shaping these policy tools and mechanisms they want to use... within their available fiscal capacity," Jørgensen said.
US strikes on Iran have led to a roughly 60 percent increase in oil and gas prices in Europe and raised fears of diesel and jet fuel shortages. He said the conflict "has a huge, unfortunately, risk of leading to higher inflation with all the negative consequences."
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The European Commission has called for "coordination and caution" regarding any measures aimed at easing pressure on energy prices, officials informed about the negotiations between Brussels and the finance ministries of the bloc's countries said.
Officials fear that the conflict will trigger a third economic crisis for the EU in six years, following the Covid-19 pandemic and Russia's full-scale invasion of Ukraine in 2022, which led to large-scale stimulus programs that increased public debt.
The EU's gross public debt-to-GDP ratio rose from 77.8% at the end of 2019 to 82.1% in the third quarter of last year, according to the latest available data.
"Targeted public policies can help mitigate the shock by reducing energy demand and compensating low-income households," ECB President Christine Lagarde said last month. However, she warned that "broad-based and open-ended measures" could be counterproductive, as they could "excessively" fuel demand and stimulate inflation. She urged policymakers to focus on "temporary, targeted, and tailored" actions.
EU Economy Commissioner Valdis Dombrovskis told the bloc's finance ministers that only "concerted," short-term emergency measures should be adopted. He warned that excessive spending "will have serious fiscal consequences," given that the crisis related to Covid-19 and the war in Ukraine, as well as a sharp increase in defense spending since 2022, have left governments with less fiscal capacity.
"We emphasize that we have limited fiscal space for maneuver, so everything member states do must be temporary and targeted," Dombrovskis said late last month.
Italian Finance Minister Giancarlo Giorgetti said last week that it was "inevitable" that Brussels would have to be more lenient in enforcing rules limiting countries' budget deficits to just 3 percent of GDP.
This came after Rome extended a "temporary" 20 percent fuel excise tax until May 1, and the country's official statistical agency said the 2025 deficit was 3.1 percent of GDP.
"It is clear that if the situation does not change, discussions at the European level will be inevitable," Giorgetti said.
The finance ministers of Germany, Spain, Italy, Portugal, and Austria on Friday called on Brussels to introduce an EU-wide windfall tax on energy companies to ease the "burden on the European economy and European citizens."
Poland has cut VAT and excise duties on fuel, amounting to PLN 1.6 billion (EUR 370 million) in lost tax revenue per month. The government plans to offset this with a windfall tax on energy companies. Details of this new tax have not yet been published.
The bloc's governments considering providing subsidies and other state aid to support affected sectors have been warned that they must still adhere to EU rules aimed at a "green" economy and reducing dependence on fossil fuels, officials said.
"The problem with such a crisis is that sometimes we have to support and subsidize things that we don't normally dream of, but it needs to be done in the short term," Jørgensen said. "Otherwise, people will freeze or production will shut down."