Germany faces scrutiny from EU peers over massive €200 billion aid scheme to cushion high gas bills

Germany, the EU’s industrial powerhouse, is facing scrutiny over a €200 billion financial scheme to help citizens and businesses cushion the pain from soaring gas bills.

The plan, described by Chancellor Olaf Scholz as a “defensive shield,” is meant to introduce emergency price brakes for gas and electricity consumption.

As the most expensive fuel to fulfil power demands, gas sets the final price for electricity, so with gas prices surging, Germany has seen record-breaking electricity prices.

“Prices have to come down, so the government will do everything it can,” Scholz said in a press conference alongside vice chancellor Robert Habeck and finance minister Christian Lindner.  

The scheme, announced on Thursday, appears to have caught Brussels and the other capitals off guard, both for its enormous scope and for its particular timing – a day before EU energy ministers met to endorse the first package of common emergency measures to address the crisis.

Although officials have expressed sympathy towards Germany, a country that was highly dependent on Russian gas and is now scrambling to find alternative suppliers, there are growing concerns the multi-billion euro plan might trigger a negative spill-over effect beyond borders and distort competition in the single market.

The German initiative has also highlighted the divide between wealthy EU countries that can accommodate new borrowing and cash-strapped governments that are desperately looking for new funds.

“Without a common European solution, we seriously risk fragmentation. So it is paramount that we preserve a level playing field for all,” said European Commission President Ursula von der Leyen over the weekend, without mentioning Germany.

‘There has been a misunderstanding’

Paolo Gentiloni, European Commissioner for the economy, and Thierry Breton, European Commissioner for the internal market, said they would review the plan.

“The massive €200 billion aid plan decided by Germany (worth 5% of its GDP) responds to a need we recognise and have highlighted – to support the economy,” they wrote in a joint op-ed for the Irish Times.

“But it also raises questions. How can EU countries that do not have the same fiscal space also support businesses and households?”

Breton promised the Commission will “carefully review” Germany’s plan and its potential impact on the EU’s level playing field.

On Tuesday, Scholz replied directly to the commissioner’s concerns.

“Commissioner Breton certainly looks around him, where he comes from, and therefore knows that the measures we are taking are not unique, but are also taken elsewhere and are justified,” the German chancellor said, appearing to refer to Breton’s home country France.

Meeting his counterparts in Luxembourg, finance minister Christian Lindner, a self-described “friendly” fiscal hawk, also defended the new borrowing as necessary to weather the fallout from the energy crisis.

Germany is widely expected to fall into a recession.

“There has been a misunderstanding. Our measure is targeted and is meant for 2022, 2023 and 2024,” Lindner told reporters on Tuesday morning. “Our package is not disproportionate. In fact, it is proportionate if you compare the size and the vulnerability of the German economy.”

Gentiloni, who met with Lindner in Luxembourg, insisted the EU needed “a higher level of solidarity” and “further common tools” to make it through the crisis.

State aid suspicions

Fuelling further criticism is Germany’s stated opposition against growing calls for an EU-wide cap on gas prices, meant to curb soaring bills before gas imports enter the common market.

A group of 15 countries, including France, Italy and Spain, support the untested measure, calling it a “priority” in the bloc’s collective response to the energy crisis.

Lindner instead suggested the EU should act as a single buyer in the international markets and secure lower gas prices.

Germany’s proposed price brake is “very unlikely” to amount to a generalised price cap and would cover only the basic consumption of a “frugal household,” according to a preliminary assessment by Bruegel, a Brussels-based economic think tank.

“Beyond this, high prices apply,” the researchers said. “If the gas price brake is designed in the same way, it could incentivise gas savings, rather than additional consumption.”

It’s still unclear if the €200 billion scheme will fall into the category of state aid. If it does, it will have to be examined and approved by Brussels before its implementation.

State aid refers to an advantage given to selected individuals or companies by public authorities, usually in the form of subsidies. This makes it harder for other businesses to compete.

German companies that are shielded from crippling gas bills could gain an upper hand against other European businesses that are forced to cut costs, limit production or shut down. The massive burrowing could trigger a subsidy race among member states and exacerbate debt levels, analysts warn.

“I see a great risk of fragmentation because the €200 billion subsidy is basically a huge amount of money that creates large advantages for German companies and consumers that other countries cannot provide,” Philipp Lausberg, a policy analyst at the European Policy Centre (EPC), told Euronews.

“There is a competitive advantage for German companies that goes against the spirit of the single market.”