Soaring cost: A coal-fired power plant of the Uniper energy company in Gelsenkirchen. The eurozone is expected to slide into recession over the winter. — AP
PARIS: Crisis-weary European governments that are spending big to cradle their economies through the energy crunch risk causing longer-term harm by spreading fiscal support for firms and households too widely.
With inflation at record levels and central banks rushing to lift borrowing costs to rein in prices, policymakers and economists are warning of a counterproductive clash if countries don’t follow a rule that’s come to be known as the three Ts: temporary, targeted and timely.
By failing to focus measures such as energy-bill relief on the most vulnerable businesses and families, governments may inadvertently boost the case for higher interest rates, while hobbling future budgets with greater debt-servicing burdens.
Liz Truss’s short-lived UK government stands as a warning of the market mayhem that can result from lost confidence.
“It’s easy to put in place measures that affect everyone: it doesn’t discriminate against anyone, so you won’t have a rebellion of the middle classes,” Gregory Claeys, a senior fellow at think tank Bruegel, said.
“If you help everyone you don’t help the poor enough, who are the ones suffering.”
European Union (EU) governments have pledged more than €550bil (US$571bil or RM2.6 trillion) to shield their economies from energy bills that have soared during Russia’s war in Ukraine.
This climbs to €710bil (RM3.34 trillion) when including support for utilities, according to Bruegel.
Eurozone members have already spent about 1.25% of economic output, or some €200bil (RM1.1 trillion).
The EU commission says around 70% of measures are untargeted, benefiting all or a very large share of populations.
While EU countries aren’t promising such sweeping tax cuts as Truss did, it’s proving politically difficult to stick to the three Ts.
Politicians must choose when to remove the bandage of subsidies and price caps. Meanwhile, targeting measures means picking who benefits, risking social divisions.
Extending help beyond the winter may upset the trade-off between efforts to cool consumer prices and supporting vulnerable households and the bloc’s international competitiveness.
For businesses trying to plan investment, uncertainty about energy bills is their “worst enemy,” European Central Bank (ECB) governing council member Francois Villeroy de Galhau said last week.
Another risk of spending too much for too long is that the reality of higher energy prices doesn’t sink in at a time when Europe needs to decrease consumption to avoid blackouts.A temptation for governments is the boost to finances from additional value-added taxes paid on increasingly expensive goods.
This shouldn’t lead to a jump in structural public spending, Spain’s central bank has warned, as inflation could eventually hit tax revenue by slowing consumption and investment.
Some countries are changing tack on the three Ts, partly after calls from policymakers not to undo monetary policy efforts.
The ECB has raised interest rates by 200 basis points this year and is expected to hike again in December, with eurozone inflation accelerating to 10.6% last month.
Bruegel’s Claeys points to Germany, which began by spending significantly on reducing fuel duty and is now trying to create incentives on retail, gas and electricity prices.
In France, where President Emmanuel Macron remembers the “Yellow Vest” protests against plans to hike taxes on gas at the pump and was the first in Europe to cap energy costs a year ago, the price shield is set to become less generous from January – though it will remain untargeted.
The government rattled its European partners with a plan to spend €200bil (RM942bil) through spring 2024.
Germany aims to subsidise basic consumption of electricity, gas and district heating for companies and households covering as much as 80% of bills.
Delays mean households won’t see any relief until March, so the government has promised lump sums in December.
Germany is preparing for a worst-case scenario in which it needs to double financial aid to Uniper SE, the nation’s biggest gas supplier, to €60bil (RM2.8 trillion) as part of a bailout that will see it nationalised.
France froze gas bills in October 2021 and capped the increase for electricity at 4%.
Combined with subsequent measures, the government expects to have spent around €100bil (RM471bil) by the end of 2023.
The “tariff shield” will be less generous from January, allowing prices to rise 15%, with no differentiation based on income, wealth or usage.
This summer, ministers planned to scrap a discount on gasoline and diesel for all drivers but ended up extending it as they failed to agree on a mechanism that would support the least well-off households and those who need to drive for work.
Italy has spent around €75bil (RM353bil). New right-wing Premier Giorgia Meloni’s government recently approved about €9bil (RM42bil) in energy aid and said it will consider new support packages.
While she promised sweeping tax cuts before taking office, once in power she admitted some promises would have to be postponed.
Her latest aid package includes continued tax breaks for companies affected by higher energy bills.
She has also extended a broad tax reduction for fuel at the pump.
Record inflation has helped boost tax revenues by 18%, enabling the government to pay for relief measures worth about 2.5% of its economy.
The Bank of Spain has warned against using extra proceeds that may be short-lived to finance permanent expenditures.
Spain has struggled to close a widening budget gap and limit public debt that hit 118% of output last year.
The Netherlands introduced a temporary price cap on gas and electricity prices, targeted subsidies for lower-income families, and an extension of a fuel tax reduction.
The price caps alone will cost more than €20bil (RM94bil).
Some economists warn the package could accelerate inflation.
There are no major payment issues yet with energy bills among Dutch households so the plan could result in higher consumer prices, according to Sandra Phlippen, chief economist of state-owned lender ABN Amro. — Bloomberg
