Energy crisis revives EU common borrowing discussion

Good morning and welcome to Europe Express.

The European Commission showed its hand yesterday on controversial proposals on how to tackle the rumbling energy crisis (including a price cap), just as Moscow announced that it was halting gas deliveries via Nord Stream as long as the sanctions regime stayed in place. In this context, we’ll unpack what a policy paper by the think-tank Bruegel has to say about feasible measures, particularly the idea of more common financing to help out struggling consumers.

We’ll also look at why “green hydrogen” projects may still be just hype and why other sources of energy could be cheaper for consumers.

And with the Slovak government losing its parliamentary majority yesterday, we’ll explore what’s next for Bratislava.

Joining forces?

Striking a suitably defiant tone, Ursula von der Leyen pledged yesterday that Vladimir Putin’s policy of energy blackmail “will fail” as she set out pan-EU measures to tackle the crisis, writes Sam Fleming in Brussels. (Read more here about what the envisaged price cap on Russian gas would entail.)

The problem is that to date, the EU has been pursuing a disjointed approach to energy that has put it in a fragile position when it comes to tackling the economic fallout across the bloc.

That, at least, is the conclusion from a Bruegel paper to be published today that calls for a “grand bargain” on energy by the EU’s 27 member states.

Member states have opted for “narrow and uncoordinated” measures so far that focus on shoring up their domestic security of supply and curb prices for their local consumers, rather than opting for an integrated approach that recognises how interconnected their energy fortunes are, the paper says.

With energy ministers due to meet in Brussels on Friday, the report argues for an end to this sauve qui peut mentality.

This would, for example, entail countries being more willing to contribute towards common pools of energy, such as extending the lives of Germany’s nuclear power plants. Demand for energy needs to be driven down, via public information campaigns but also by governments ending measures that directly subsidise energy consumption.

And governments need to ensure that burdens are more fairly shared among member states. One way of delivering this would be the creation of a “joint European fund” that could be used, for example, to compensate citizens in Groningen who could suffer more earthquakes if the Netherlands boosts gas production from the region.

Such a fund could also compensate Spain if it permitted Algerian gas to be rerouted through Italy, to make it easier to fuel central European markets, according to the paper, which is written by Ben McWilliams, Giovanni Sgaravatti, Simone Tagliapietra and Georg Zachmann.

Needless to say, any talk of joint EU funding takes the union back into highly sensitive political territory. While member states were willing to embark on common borrowing underpinning the €800bn post-Covid recovery fund, the deal was always that this should be a one-off, temporary endeavour, not the thin end of the joint-debt wedge.

Northern member states remain acutely sceptical about any bids for fresh fiscal burden sharing.

But Bruegel is not alone in broaching the subject. The IMF yesterday floated the idea of a new central “fiscal capacity” in the union to help fight downturns in member states and fuel investments in green energy.

And later Emmanuel Macron, France’s president, said he wanted to see a new levy imposed on energy companies at a European level, rather than just nationally, targeting groups making big profits with the proceeds given back to member states.

Another idea being examined by some EU officials is a reboot to the union’s pandemic-related unemployment reinsurance scheme — dubbed Sure — as part of efforts to fight the fallout from soaring power bills.

If large numbers of factories are forced to put employees on temporary leave because high energy costs make production unaffordable, for example, the argument for Sure to be extended may gain more traction.

The underlying fear is that, just as with the Covid crisis, the current energy maelstrom triggers renewed economic fragmentation between member states, given that some capitals have greater budgetary firepower to fight the malaise than others, as well as differing energy mixes.

“By sealing a special declaration on a European grand energy bargain, EU leaders would commit their governments to a co-ordinated and fair approach to the energy crisis,” the Bruegel note argues.

Chart du jour: Fossil vs renewables

Brussels may have underestimated how much dirty energy will be needed for more than just the short term, writes Alice Hancock in this deep dive into Europe’s energy woes.

Hydrogen hype

In the heady days when Europe talked more about clean fuels than an energy crisis, green hydrogen became something of a poster child for its climate action, writes Alice Hancock.

EU climate chief Frans Timmermans said the fuel, which was described as “green” when it was produced from renewable energy, would be the “driving force” of the bloc’s future economy.

But a new study published by the NGO Global Witness has cast doubt on its use in private homes at least, which is something that the European Commission has pushed as part of its “Gas Package”.

Global Witness says that using estimates of how much it would cost to build and operate the infrastructure needed to pipe hydrogen — a highly flammable gas — into people’s homes, consumers risk paying double what they were paying for gas at the end of 2021, when energy prices had already started to rise (but admittedly were not as high as today). 

“It is clear that for households, switching to hydrogen would make Europeans already facing energy poverty even poorer,” say the authors. They warn that the gas industry has won the upper hand by having their suggestion that “end users” (aka households) should contribute to hydrogen infrastructure costs included in the gas package.

The draft proposals are currently under discussion in the European parliament and council but pilot schemes for hydrogen heating are already beginning to take place. In Lochem in the Netherlands, this autumn hydrogen boilers will be installed in a street of 15 houses, in a test run by the Dutch heating company BDR Thermea. It hails the project as “affordable clean heating technology taking a decisive step towards the market”.

Separately to Global Witness, a report on EU energy efficiency labels by the NGO ECOS Standard, also says that hydrogen heating for homes is “nonsense” and less efficient than using fossil gas. “Direct electrification through heat pumps is consistently more efficient and economical, and renewable hydrogen should only be used in sectors that are hard to decarbonise,” it says.

For cars, perhaps, and steelmaking, but not for homes is the gist. Perhaps hydrogen is not the cure-all the commission might have hoped.

Slovak wobbling

Slovakia’s coalition government was pushed to the brink of collapse yesterday, after losing its parliamentary majority with the resignation of ministers from one of the ruling parties, writes Raphael Minder in Wroclaw.

The resignations of four ministers from the centre-right Freedom and Solidarity party, known as SaS, follows months of feuding between party leaders in the coalition and raises significantly the likelihood of a snap election.

Prime Minister Eduard Heger said yesterday that he would first reshuffle the government to fill the vacancies. The departing ministers included SaS party leader Richard Sulik, who was the economics minister, at a time when Slovakia risks a major economic downturn sparked largely by soaring energy prices after Russia cut off its gas supplies.

Since early summer, SaS had been demanding the resignation instead of finance minister Igor Matovič, amid a dispute over what legislation the government should adopt to help households cope with surging inflation.

Matovič, who is the leader of the Olano centrist party, was already forced to abandon the premiership last year after failing to disclose the purchase of Russian Covid vaccines, which added a scandal to the criticism that he was already facing for his response to the pandemic. But Matovič remained in government by swapping portfolios with Heger, who had been finance minister.

Slovakia was not scheduled to hold another parliamentary election until February 2024 but infighting among the governing party leaders has returned the country to political turmoil.

An early vote could, in fact, allow Robert Fico and his Smer party to make an unexpectedly early political comeback. Fico resigned as prime minister in 2018 amid nationwide anti-corruption protests triggered by the murder of an investigative journalist and his fiancée.

What to watch today

1. IMF chief Kristalina Georgieva speaks at Bruegel annual meetings

2. EU-Georgia association council takes place in Brussels

3. EU health ministers meet for an informal council in Prague

Notable, Quotable

I am less confident . . . about the convergence of the negotiation process and the prospect of closing the deal

• Iran deal flop: The EU’s chief diplomat has said that efforts to strike a new agreement on Iran’s nuclear programme are “in danger” after the US and Iranian positions diverged in recent days.

• Referendum postponed: Officials in Kherson have halted work on a stage-managed vote for Ukraine’s occupied southern region to join Russia, as Kyiv’s offensive to retake the area builds momentum.