[Opinion] European energy solidarity is both a necessity and an opportunity

If parts of Europe are cold and hungry while others are able to defend themselves, there will be a political backlash that could tear the EU apart. To prevent this, the EU should create a European Energy Solidarity Mechanism.

Adding to pre-war pressures, Russia’s war on Ukraine and Putin’s weaponization of Russian gas have destabilized the global energy market, pushing up prices and creating supply bottlenecks, with dire consequences for Europe even before extra winter demand begins. This crisis will most likely last beyond the winter, when empty gas storage tanks will need to be refilled. Higher energy costs will also further inflate food prices already under pressure from the war. While there are crucial uncertainties, not least the weather and how the war will play out, it already seems certain that energy bills for households and businesses will rise, often to prohibitive levels, compounded by pressure from rising food prices.

  • Fabian Zulig (Photo: EPC)

While there needs to be recognition and communication that governments can only do so much, it is also true that governments must live up to their responsibility to protect their citizens, especially the most vulnerable. Governments across the EU are therefore implementing cushioning schemes, partly to contain prices, partly to provide direct support to part/all of the population and/or businesses.

This is not only an acknowledgment of the need and responsibility to help; governments know full well that there will be political and electoral consequences if they fail to provide at least a minimum level of support.

Distributional Implications of the Energy Affordability Crisis

The distributional consequences of this energy affordability crisis are significant at the national level, but also at the EU level. Not only are countries affected differently by the energy crisis due to their dependence on gas or the ownership structures of their energy market, among other factors, they also have very different capacities to deal with the problem, for example in terms of fiscal space, have own disposition. Germany has a debt-to-GDP ratio of around 70%, for example, while France has a ratio of over 110%, Italy over 150% and Greece over 190%.

Although there is some recognition that European energy solidarity is needed, not only within member states but also between them, including in financial terms, there seems to be a lack of political will for the time being to take additional measures, especially among the governments of economically more strengths. This is despite the obvious and unavoidable cross-border problems that arise from an integrated market, such as how to deal with the redistribution of any pan-European windfalls or price and supply side effects. Any (inevitable) internal intervention in the energy market implicitly creates a cross-border distribution of costs given Europe’s interdependence.

A winter of European discontent

These distributional effects imply policy implications at the EU level. If in a severe disaster situation, where basic needs such as food and energy become unavailable in certain geographical areas or parts of society but not in others, when the population sees generous support schemes in some countries but not in others, when the consequences and spillover from the actions of some countries negatively impact others, the political backlash will be severe. The political upheaval would be compounded by a moral dimension if countries that have made mistakes in the past that now affect energy security and affordability for all, for example Germany with Nord Stream 2, are not held accountable.

At the simplest level, if some parts of Europe are cold and hungry while others are not, the political backlash carries a high risk of tearing the European Union apart, undermining the basic premise of European integration: we’re all in this together. Even if this does not happen in the short term, the consequences will be severe, as each country will then be incentivized to engage with the EU only if it sees a direct financial gain, blocking most action, rendering the Union powerless to move forward.

In it together?

This major political issue explains the strength of the backlash against Germany’s energy support package, which costs a whopping €200 billion to provide support measures and maintain energy affordability in Germany. It is believed to have been developed without consultation with other EU partners and without taking into account negative cross-border effects. In response, Berlin pointed to support packages elsewhere and stressed a willingness to consider more general EU action, for example in the form of loan instruments provided at EU level.

This should be seen as an opportunity: it is in the enlightened self-interest of Germany and all other EU countries to introduce a European mechanism, not least because there is a need to complement national responses, for example state aid packages, with a European avoidance mechanism of distortions and negative effects, but also to prevent any political backlash.

Parallels can be drawn with the EU’s response to the Covid-19 crisis, which was widely seen as a positive moment in European integration. In the case of the pandemic, the European Recovery and Resilience Facility (RRF) has effectively demonstrated solidarity while ensuring that countries such as Germany can continue with their national support packages. This response to the pandemic represents a political bargain that signals the acceptance and resolution of national measures, as long as they are complemented by an EU-level mechanism.

European Energy Solidarity Mechanism

The EU needs a financial European mechanism for energy solidarity. Such a mechanism, Europe CARES (Common Resource Allocation for European Solidarity), would differ from the RRF in many important respects. It should be aimed not only at EU countries but also at acceding countries in recognition of their common future with the EU. But it should exclude those EU and acceding countries that cushion the blow by continuing to depend on Russian energy.

The solidarity mechanism will be available to countries that are negatively affected by food and energy prices, regardless of their income level, but will require the most able to also make a corresponding contribution, even if they are among the most affected by the energy crisis. It is in the enlightened self-interest of all parties to create such a mechanism to ensure the future of European cooperation, to maintain the alliance against Russia and to ensure that the EU’s economic foundation, the Single Market, is not fatally undermined through national action while enabling member state governments to counter the crisis.

Europe CARES will be in line with the conclusions of the European Council of 21-22 October (REF), which noted that “the immediate priority is to protect households and businesses, in particular the most vulnerable in our societies. …. All relevant instruments at national and European level must be mobilized to improve the resilience of our economies while preserving Europe’s global competitiveness and maintaining a level playing field and the integrity of the single market.”

Such an energy solidarity mechanism should not replace or be seen as replacing the many actions the EU is currently taking to address the energy crisis, but rather be a necessary complement to them.

Europe CARES will not be an EU instrument, but a parallel intergovernmental mechanism, such as the European Stability Mechanism (ESM) or the Fiscal Compact. It would therefore not fall under the EU’s normal budgetary rules, which give all EU member states the right to veto the creation of such a mechanism or its conditions.

Importantly, this should be a genuine redistributive mechanism providing direct budgetary support to governments, not on a loan basis. Its goal would be European energy solidarity, pure and simple, without complicated payment rules and conditions of use, apart from financing the aid packages provided by governments. A redistribution mechanism would have the advantage of being able to respond quickly than investment mechanisms, which take a long time and are not effective immediate emergency tools. While investment is undoubtedly also needed, the immediate focus should be to get through the winter of discontent.

Demonstrating that Europe CARES

Beyond needs, Europe CARES should be clearly targeted, providing support to the most vulnerable, but avoiding negative side effects by, for example, accelerating supply bottlenecks if funding is to be used to outbid others in the market. It should also be clear to citizens that this support is part of European energy solidarity. Thus, Europe CARES will have three disbursement principles:

1) Focus on demonstrated NEED available to those countries adversely affected by food and energy prices unmitigated by continued dependence on Russia;

2) these countries will need to commit to TARGETED action targeting those most in need, to minimize negative effects and cross-border market distortions, and to take action to make energy savings. The assessment could be carried out by a pan-European expert panel with the support of the Commission, also making recommendations on how negative cross-border impacts can be minimised;

3) and it will have to be STATED clearly to the beneficiaries that this is a European solidarity mechanism that recognizes that we are all in this together.

Who’s paying?

In terms of funding, Europe CARES can be built from national contributions, but it should go further than that. Any national or European mechanism that extracts windfall profits from energy companies or certain energy suppliers, such as Norway, can contribute to Europe CARES, potentially involving such governments in decisions about how to allocate funds.

Similarly, EU countries could voluntarily earmark any refunds of unused EU funding to such a mechanism. It could also be a channel to direct European and international aid to some of the countries that need additional support, including some of the acceding countries, going as far as Ukraine itself. It can also go beyond financing, looking at the allocation of scarce resources when there is an energy shortage despite ongoing efforts to reduce energy consumption and explore new sources of supply.

Turning a crisis into an opportunity

This is not an easy question at a time when all parties are under pressure. But this should be seen as an opportunity. The challenges we face in Europe are common challenges and only if we work together and show solidarity can we tackle them. Europe CARES will be a visible sign that we all recognize this fundamental truth. It would also create a sting in the tail for those unwilling to be part of Europe’s political consensus when it comes to Russia’s aggression, effectively limiting this mechanism of solidarity to those making energy sacrifices in the common fight against Putin’s war.

This would turn a situation of existential challenge—some Europeans being hungry and cold while others are not—into an opportunity; by showing solidarity and ensuring that no part of Europe has to be cold and hungry, this would strengthen European cooperation. This will demonstrate to European governments and citizens that European integration is an essential part of the response to the challenges we face, thereby counteracting the political backlash that would otherwise inevitably follow.

It is also the right thing to do, demonstrating that European countries are not only protecting their own citizens, but acting together to help all those affected by this common challenge. In short, the General Distribution of European Solidarity Resources would show that Europe DOESN’T CARE.

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