Because the German “shield” of 200 billion euros is not what it appears to be

On September 29, Germany announced a € 200 billion “economic defense shield against the consequences of Russia’s war of aggression”. There are three new features in the package. First, it involves a much larger fiscal commitment – a € 200 billion economic stabilization fund – than the previous package, announced on September 7 (€ 65 billion, which was to be financed mostly with levies, not with new loans). Secondly, it introduces a new support measure, called the ‘gas price brake’, designed to reduce average gas prices. Although it was mentioned in the previous package, its details now need to be worked out at an accelerated time, by the end of October. According to preliminary estimates, the measure would cost between 15 and 24 billion euros if applied only to families. Thirdly, a plan to introduce a levy on all gas consumption of 2.7 cents per kWh from 1 October “because it is no longer necessary”, in the words of Chancellor Scholz, is eliminated. In its place there will be support for troubled gas importers who have lost their contracts with Gazprom after the Kremlin’s stop to flows.

The package announced by the Chancellors has raised a lot of criticism in Europe. First of all, precisely because of the lack of coordination at European level. Commenting on the package, Finance Minister Lindner said that “Germany is using its economic firepower in this energy war.” However, Europe is fighting this energy war together, and ensuring that this unity is maintained is of paramount importance to defeating Putin’s energy blackmail. With the announcement of this package, Germany appears to want to exert its fiscal strength to subsidize gas consumption in Germany, driving up prices and harming its neighbors. This can only make other European countries nervous, which for some time have been pushing for a European solution to the problem of gas prices. From a European perspective, the timing of the announcement was particularly unfortunate, as it came the day before a major meeting of EU energy ministers, tasked with agreeing on a series of European emergency interventions in the sector.

Second, the avoidance of German tax rules. The German “debt brake” is currently on hold, but the government has pledged to have it come into effect next year. Since it is impossible to finance the support package within the federal deficit limit of 0.35% of GDP provided by the debt brake, the government must actually pre-finance next year’s deficit through large-scale loans today (which the German constitution allows. in case of emergency). It is therefore a world of creative finance, which especially angers the Germans themselves.

However, the package is less harmful than it appears. First, the ‘gas price brake’ is very unlikely to take the form of a general gas price cap. Although the details are not yet clear, it is thought that this is a construct similar to the previous “electricity price brake”, which subsidizes electric units only up to a maximum level of consumption, calculated as the consumption of a family frugal. Beyond this limit, high prices apply. If the gas price brake is designed in the same way, it could incentivize gas savings rather than additional consumption. This seems to be the intention: the German government’s announcement is full of references to the need to save gas. In this case, the measure would be fully in line with the EU emergency measures agreed by the Energy Council on 30 September.

Secondly, the EUR 200 billion is probably much higher than the support measures they intend to finance, for two reasons. First, the € 200 billion partially replaces the previously announced 34 billion € levy on gas, which has now been eliminated. Secondly, part of the € 200 billion is only precautionary: it is intended to pay for potential future needs that have not yet been specified today. Normally, these would simply be covered with a loan next year. But the government tied its hands not to (in the form of a commitment to restore the debt brake). Consequently, he needs to get into debt now.

In conclusion, the package certainly sends the wrong signal: Germany is using its fiscal power in a way that can harm other European countries. But this is not an immediate expenditure of 200 billion euros to protect German households and businesses from rising energy prices. Rather, a bazooka was created in response to a German oddity: the decision to effectively suspend new net loans next year. And depending on how the ‘gas brake’ is conceived, gas consumption in Germany may not increase, but may even decrease.

The main risk of the package is its potential to disrupt the European internal market. In the absence of a common European fiscal response, governments with more fiscal space will inevitably be able to handle a crisis better. If this is done in a way that has a positive impact on other EU countries, it may be acceptable. But if the brake on the price of gas in Germany means that German companies have a better chance of surviving the pandemic than, for example, Italian ones, this would further aggravate economic divergences in the EU and threaten European unity. Russia.

In the darkest moments of the pandemic, the answer to this question was the creation of the Next Generation EU. In the coming weeks, European leaders will have to tackle the issue again and decide how to deal with it. The fact that the German negotiators now have a substantial fund to draw from to contribute could ultimately be useful in catalysing an agreement that improves conditions for all Member States.