Europe’s economic outlook to worsen amid gas supply disruptions

Good morning and welcome to Europe Express.

Gazprom went ahead yesterday with its scheduled shutdown for maintenance of its direct gas pipeline to Germany. In Berlin and Rome, officials are not fully convinced that taps will be turned back on in 10 days.

We’ll look at how this latest disruption is further denting Europe’s economic growth and what EU officials have to say about it.

Meanwhile, another voting round among eurozone finance ministers yesterday failed to resolve the stalemate regarding a new head of the area’s bailout fund, though the field has narrowed to two candidates.

And in taxation news, we’ll hear from the Dutch official in charge of closing the loopholes the country once prided itself upon.

Coping with closed taps

The disruptions in Germany and Italy yesterday following Gazprom’s move to turn off the Nord Stream 1 gas pipeline yesterday were a stark reminder of how fragile Europe’s economic recovery is, write Silvia Sciorilli Borrelli in Milan and Sam Fleming in Brussels.

The 10-day shutdown is for scheduled maintenance, but it comes after a series of disruptions in recent weeks and months, with the European Commission having so far counted 12 member states that saw their Russian gas supplies partially or totally cut off this year.

Italian energy supplier Eni said that Russian gas imports had dropped by a third as a consequence of the pipeline being shut down, in addition to other recent disruptions it had experienced.

Officials in Rome and other capitals are beginning to think these frequent cuts in gas supplies from Moscow might become permanent and energy companies are scrambling to increase storage levels.

“We are working to contribute to creating a reserve that is indispensable over the winter,” Snam chief executive Stefano Venier told a video conference yesterday. “As of Sunday we had reached 64 per cent of our target,” he said.

Energy minister Roberto Cingolani is discussing with his cabinet colleagues the possibility of launching a campaign to raise awareness among the population on how to save energy. “We have to do this now as after the summer is when consumption starts growing,” said Cingolani.

The Italian government is cautiously optimistic that the country can rapidly wean itself off Russian gas, provided energy companies can fill the storages before the winter. Other contingency measures, such as the rationing of electricity, are ready but officials in Rome have reiterated they will be put in place only if strictly necessary.

But businesses fear a halt in supplies could impact their production and further increase their costs. Some in Italian politics are seizing on those concerns, pointing fingers at the EU’s stance against Russia as they rally support ahead of the elections scheduled in 2023.

A halt in gas supplies from Russia would be the worst possible scenario for the country: the Bank of Italy governor Ignazio Visco said last week the scenario risked plunging Italy into a recession.

At the EU level, the commission is due to release its latest growth outlook on Thursday. Paolo Gentiloni, the economics commissioner, said after the eurogroup meeting yesterday that there was now “very limited growth” compared with what had previously been forecast. Pluses for the economy included low unemployment, ample savings and the reopening of tourist activities following the lockdowns, he said.

But given the possibility of further energy disruptions there was possible “stormy weather” heading Europe’s way.

Separately, the commission is expected to come forward with contingency planning, particularly on co-ordinating gas rationing for industrial sectors if needed, but also for encouraging national authorities to carry out public information campaigns about the merits of using less energy.

The commission is not in the business of telling people “how much time they should spend in the shower, but we do encourage energy savings”, said commission spokesman Tim McPhie. “The cheapest energy is the energy you never use.”

And then there were two

The eurozone’s bailout fund is still in search of a new chief after finance ministers failed to coalesce around a candidate during a meeting yesterday, write Sam Fleming and Valentina Pop in Brussels.

Italy’s decision to withdraw Marco Buti left just two candidates in the race to be managing director of the European Stability Mechanism — namely João Leão of Portugal and Pierre Gramegna of Luxembourg.

In voting during a meeting in Brussels, neither of the two reached anywhere near the 80 per cent threshold needed to carry the day. The eurogroup would return to the issue again in September, said its president, Paschal Donohoe of Ireland.

The succession issue at the ESM is coupled with a broader question about what its future role will be in fighting conflagrations within the eurozone, given it has not been called upon to dole out emergency funding during recent economic crises.

Klaus Regling, who will be stepping down this autumn as ESM chief, said he remained confident that a candidate would be found. But it is getting closer to his leaving date.

If the ESM race drags on too long, it could influence the succession of another German heading a financial institution: Elke König, whose term at the helm of Brussels-based Single Resolution Board ends in December.

Europe Express understands there are two candidates so far, both senior regulators: Finland’s Tuija Taos, who’s been the head of the national financial stability authority since 2015 and her counterpart from France, Dominique Laboureix.

Chart du jour: Webb captures

Read more here about the first images the Webb telescope has sent back to Earth and the early scientific observations unveiled today by the US and European space agencies, Nasa and Esa.

Dutch sandwich, binned

The Netherlands is tackling tax evasion in the EU with the zeal of a convert. A country once notorious for the loopholes in its tax laws is now among leaders in the fight against dodgy money flows, writes Andy Bounds in The Hague.

The most effective tool so far has been a withholding tax on interest and royalties sent via the Netherlands to low tax jurisdictions, finance state secretary Marnix van Rij told Europe Express.

He said the tax had reduced such flows towards low-tax destinations from €38bn in 2019 to €6bn last year. It has also vastly reduced the use of schemes such as the “Double Irish with a Dutch sandwich” which involved companies sending their licence payments to a head office in the Netherlands and then paying lower taxes on them in Ireland.

In 2024, a withholding tax on dividends should take effect which should cut flows further.

Given that the Dutch corporate tax rate of 25.8 per cent is among the highest in the EU, van Rij wants to ensure tax avoiders do not use other member states instead. “We need the EU to measure the numbers. You can see whether the policy has been effective across the EU or not.” He also wants a withholding tax mandated by the EU to level the playing field.

The Dutch government is also backing a proposal from the European Commission to tax shell companies, another sector it is finally cracking down on. These typically have an office address and a director in an EU member state purely to take advantage of low tax rates while conducting business elsewhere.

Van Rij said a number of unnamed member states were opposing action since shell companies are “part of their business model”.

A former tax adviser at professional services firm EY, van Rij said countries should harmonise measures to cut high fuel prices. Germany and Belgium have slashed fuel duty more than the Netherlands, sending Dutch drivers over the border. Some drive long distances to Germany to save almost 40 cents a litre, consuming more fuel and denying revenues to the Dutch exchequer.

“You get a race to the bottom,” he said. “We need to debate how we are going to manage this.”

What to watch today

1. EU finance ministers meet in Brussels

2. Croatia signs legal acts to join the euro area as of January 1

Notable, Quotable

The job of the prime minister at this stage is to let the party decide, let them get on with it

• No endorsement: Boris Johnson has refused to endorse any of the candidates who threw their hat in the ring to succeed him as British prime minister, in what is shaping up to be a crowded field of nearly a dozen names.

• Keep calm and carry on: Regardless of who replaces Johnson, Britain’s leading role in providing weapons to Ukraine in its fight against Russia’s invasion will endure, the country’s ambassador to Nato told the FT. 

• Second booster: European health agencies have recommended second booster shots of Covid-19 vaccines to those over the age of 60, as highly transmissible variants drive up hospital admissions across the continent.