As the crisis unfolds, Europe is once again turning to big spending

BRUSSELS – Nationalization. Subsidize. Cash out. Limited price. Income tax. It goes back to 20th century economics in Europe.

Governments are using old solutions, long seen as bad policy, to throw huge sums of money at the energy crisis engulfing the region, in an attempt to avert a political and social crisis. and economic.

Russia’s confrontation with Ukraine is upending European economic orthodoxy at a rapid pace with little dissent at the headquarters of the European Union in Brussels, a bastion of fundamentalism. neoliberal which not long ago imposed brutal austerity on its members, especially Greece, even. after it becomes clear it is harmful.

But today EU leaders see little choice. Russia has reduced supplies of natural gas to most of the European Union by a trickle, in retaliation for the bloc’s enthusiastic support for Ukraine, and the cost of fuel – and in other words electricity. – is at a historic high and is growing.

In response, EU governments have set aside more than $350 billion to subsidize consumers, industry and utility companies; Ministers will meet on Friday to finalize the bloc’s direct intervention in the market to capture excess profits, cap electricity prices and subsidize utility companies.

“Government intervention is back in vogue in a really big way,” said Mujtaba Rahman, regional director for Europe at consulting firm Eurasia.

“It’s really about building public support through what will be an extremely difficult winter and 2023, about curbing Russian aggression, the liberal international order, the It is necessary to build public support for understanding the conflict,” he said, adding, “This is the price to pay.”

Massive public spending in addition to the nearly trillion dollar stimulus package passed over the past year in response to the economic downturn caused by the pandemic, mainly through debt. Rising debt volumes would normally cause an uproar in the bloc, where fiscal conservatism has dominated policy and politics for years.

The lack of protest is a measure of the extent to which policymakers fear that European consumers and businesses will overcome the sudden drop in energy costs, leading to social unrest and chaos. politics, as well as recession.

“A couple of weeks like this and the European economy will come to a complete halt.” Prime Minister Alexander De Croo of Belgium said in an interview with Bloomberg on Thursday. “The risk of that is deindustrialization and the risk of serious underlying social unrest.”

With memories still fresh of the French Yellow Vest movement – born as a revolt against energy tax hikes – spending billions and abandoning the old orthodoxy may be the only way to go. to retain voters with strong European support for Ukraine against Russia.

Daniel Gros, a German economist and director of the Center for European Policy Research, a Brussels-based think tank, said: time. “It’s structurally different from raising unemployment or social benefits forever, and it’s a special situation that won’t last forever.”

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

The Belgian government gave $100 to each household regardless of income.

The Greek government, facing the ballot box next year, has pledged nearly $7 billion, or about 4% of annual economic output, over the past three months to subsidize all energy bills in Greece. this country. To finance much of this spending, the country levied taxes on the excess revenues of energy companies using sources other than natural gas.

The Czech government on Sunday was pushed to announce support measures, after narrowly surviving a vote of no confidence on electricity costs. In an early sign of the broader upheaval the issue could cause, tens of thousands of people took to the streets of Prague last weekend in protests that appeared to be led by protest fringe groups. NATO membership and Ukraine’s support.

And, cash handouts and subsidies aside, more direct market interventions are on the way.

“The electricity market is no longer an active market because there is one actor, Putin, who is trying to destroy it and systematically manipulate it,” said European Commission President Ursula von der Leyen said in a statement last week. “So we really have to react to that. And that is why we are now dealing with the composition of the electricity market. “

On Wednesday, she unveiled staff proposals, including limits on what EU countries are allowed to pay Russia for natural gas, taxing energy companies’ profits and suspending energy companies. The rule makes it illegal for the government to subsidize companies that allow the funding of utilities. Burn cash to buy expensive fuels to produce electricity.

The proposals will be debated by energy ministers on Friday, and the bloc could adopt a series of policy interventions as early as this month, before the weather turns colder and the crisis is felt. deeper.

The European Union’s stringent fiscal measures typically seek to punish countries with deficits exceeding 3% of annual economic output and debt of more than 60% of output.

But those were suspended early in the pandemic to allow for a massive stimulus package to support economies already sunk by shutdowns and supply chain disruptions.

While EU leaders insist that the diversion is temporary, change is imperative: The average deficit of EU countries has risen to more than twice the allowable limit and the average debt has reached 90 % of economic output.

In Germany, the bloc’s largest economy and biggest financial hawk, which has a constitutional debt brake, the issue seems to have been put aside. Germany violates EU rules (now suspended) and doesn’t seem to be concerned about it.

The bloc’s top policymakers are now saying the rules need to be changed for the better, which could turn out to be one of the most important changes in a generation of liberal economic policy. dominated by the West, with major political and social implications.

“The pandemic has left a legacy of significantly higher levels of public and private debt. Paolo Gentiloni, the EU’s top economic official, said on Wednesday the need to rebuild the fiscal buffer was clear. “However, debt relief strategies must be realistic if they are to ensure stability and support growth,” he added, warning that the bloc could very well slip into recession.

He said the EU would start looking at changes to its strict fiscal rules to soften these rules and make them more in tune with the economic cycle.

“It’s time to move on, leaving the traditional divide behind,” he said.

For left-wing economists, who have opposed austerity since the global financial crisis and the era of austerity it ushered in, this moment represents a victory. the best of pyrrhic ideology.

“It is very tragic indeed,” said Frank van Lerven, a senior economist at the New Economics Foundation, a progressive think tank. “For the past ten years and beyond, we have been told that workers and pensioners and young people all have to make sacrifices and that we need to live within our means. We have seen our infrastructure deteriorate, our health system deteriorate. “

“All in vain,” he concluded. “Dogma has been clearly exposed as a narrow political ideology, devoid of macroeconomic thinking, weaponized for narrow political ends.”

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