The EU prepares for a 10% energy rise

In the last two years, the European economy has navigated in uncharted waters. To the covid pandemic is now added the war started by Russia in Ukraine, an “extraordinary” situation in which navigation charts are of little value. “The uncertainty is enormous and it is still early to assess the effects that this conflict will have on the European economy,” acknowledged the Commissioner for the Economy, Paolo Gentiloni. An increase in the price of energy, higher inflation, supply bottlenecks… The combination of these factors will “significantly weigh” Europe – which, according to February forecasts, was going to grow by 4% this year –. However, Brussels rules out that the war will “derail” the path of recovery.

As the EU economy and finance ministers predicted on Wednesday, the price of energy will be the main risk for the European economy. The cost of gas and oil is expected to continue to skyrocket until the end of the year and Europe is preparing for a rise of up to 10%. The objective of Brussels is that this does not affect the electricity bill of consumers and is working on a series of measures that will be presented next week.

According to the French Economy Minister, Bruno Le Maire, the increase in the cost of energy will increase inflation by 0.2%. The EU’s economic growth “is robust”, but the high price or lack of Russian gas would bring “serious consequences” for the member states most dependent on this supply. In the face of this crisis, Brussels advocates using the same recipe as during the pandemic: more coordination and solidarity among the Twenty-seven.

Thus, the EU will reassess its fiscal policies this spring. It was planned that, as of 2023, the application of European fiscal rules would be resumed, however, now Brussels does not rule out extending its suspension. These deficit and debt control rules were frozen in 2020 so that States could dedicate greater public spending to deal with the pandemic.

Despite Putin’s possible retaliation for European sanctions, the European Commission defends that “Europe is in a strong position, with robust growth, and it is a price we are willing to pay to defend democracy,” Gentiloni said.

trust is key

In its guidelines on fiscal policies for 2023, the Community Executive advocates guaranteeing debt sustainability, with a gradual fiscal adjustment and the implementation of investments and reforms. Fiscal strategies will have to take into account the support of the Next Generation Funds and will have to be adapted to the situation of each Member State.

The commission advises the most indebted countries – those that accumulate a deficit greater than 60% of their GDP – to begin “a gradual reduction” of their debt through budget adjustment. This objective, yes, should not cloud the need to carry out the ecological and digital transitions, says Brussels.

The European Commission warns that the fall in confidence in the European market is another of the greatest risks for the economy. In fact, Gentiloni fears that the adverse effects on consumption and investments are already beginning to be felt. Trade Commissioner Valdis Dombrovskis agreed that the effects of the sanctions “are having an immediate impact” on the EU. In addition, economic support to Kiev and humanitarian aid to refugees “will also unbalance the community budget,” he assured.

But the one who is suffering the most from the effect of the sanctions is, without a doubt, Russia. With the paralysis of more than half of the assets of the Russian Central Bank and the disconnection of the SWIFT payment system of seven banks, “we have short-circuited their financial system,” Minister Le Maire celebrated. In addition to the announced punishments, the Heads of Economy and Finance of the Twenty-seven discussed additional measures that will affect cryptocurrency assets so that Moscow “cannot dodge the sanctions imposed by Europe.”