As crises mount, Europe turns once again to big spending, throws vast sums at energy crunch

The EU governments' huge public spending is in addition to a nearly trillion-dollar stimulus package adopted over the past year. PHOTO: NYTIMES

BRUSSELS - Nationalisations. Subsidies. Cash handouts. Price caps. Profit taxes. It is back to 20th-century economics in Europe.

Governments are resorting to old-school solutions, long dismissed as bad policy, throwing vast amounts of money at the energy crisis engulfing the region to avert a political, social and economic meltdown.

The stand-off with Russia over Ukraine is upturning European economic orthodoxy at rapid speed with barely a peep of dissent at the European Union's (EU) headquarters in Brussels, a bastion of neoliberalism that not so long ago imposed brutal austerity on its own members, most notably Greece, even after it became clear that it was harmful.

But today, EU leaders see little choice. Russia has reduced to a trickle its supply of natural gas to most EU countries, in retaliation for the bloc's staunch support of Ukraine, and the cost of the fuel - and by extension, electricity - is at historic highs and rising.

In response, EU governments have already earmarked more than US$350 billion (S$490 billion) to subsidise consumers, industry and utility companies; ministers are to meet on Friday to finalise the bloc's direct intervention in markets to grab excess profits, cap electricity prices and subsidise utilities companies.

"Government intervention is back in vogue in a really big way," said Mr Mujtaba Rahman, Europe director at the consulting firm Eurasia.

"It is really about building public support through what is going to be an incredibly difficult winter and 2023, about containing Russian aggression, the liberal international order, the need to build public support to see the conflict through," he said, adding: "This is the price to be paid."

The huge public spending is in addition to a nearly trillion-dollar stimulus package adopted over the past year to deal with the economic fallout from the Covid-19 pandemic, mostly through borrowing. The ballooning debt load would have normally caused an uproar in the bloc, where fiscal conservatism has dominated policy and politics for years.

The lack of opposition is a measure of how fearful policymakers are that European consumers and businesses will bridle at shouldering the suddenly astronomical energy costs, ushering in social unrest and political chaos, as well as a recession.

"A few weeks like this and the European economy will just go into a full stop." Prime Minister Alexander De Croo of Belgium said in an interview with Bloomberg on Thursday. "The risk of that is de-industrialisation and severe risk of fundamental social unrest."

"This is clearly an exceptional and one-off situation," said Mr Daniel Gros, a German economist and director of the Centre for European Policy Studies, a Brussels-based think-tank. "It is different from increasing unemployment or social benefits structurally forever, and it is a special situation that won't last forever."

European leaders certainly hope so, because the spending levels would be hard to sustain. The German government on Sunday announced a US$65 billion support package, its third and largest so far, that includes direct cash handouts to the most vulnerable consumers and tax breaks to energy-intensive businesses.

The Greek government, which faces the ballot box next year, has committed nearly US$7 billion, or about 4 per cent of its annual economic output, in the past three months to subsidise all energy bills in the country. To finance most of this spending, the country has already put in place a levy on the excess revenues of energy companies that use sources other than natural gas.

The government of the Czech Republic on Sunday was pushed to announce support measures, having narrowly survived a no-confidence vote over the cost of electricity. In an early sign of the wider volatility the issue could introduce, tens of thousands took to the streets of Prague last weekend in demonstrations that seemed to be led by fringe groups protesting the country's membership in Nato and its support of Ukraine.

And cash handouts and subsidies aside, more direct market interventions are afoot.

"The electricity market is no longer a functioning market because there is one actor, Putin, who is systematically trying to destroy it and to manipulate it," President Ursula von der Leyen of the European Commission said in a speech last week, referring to Russian President Vladimir Putin. "So we really have to react to that. And that is why we are addressing now the composition of the electricity market."

On Wednesday, she unveiled her staff's proposals, which include a cap on what EU countries are allowed to pay Russia for natural gas, taxing energy companies' profits and suspending rules that make it illegal for governments to subsidise companies to permit the funding of utilities that are burning through cash to buy outrageously expensive fuels to make power.

The proposals will be debated by energy ministers on Friday, and the bloc could adopt a set of interventionist policies as early as this month, before the weather gets colder and the crunch is felt even more deeply. NYTIMES

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