LDN - Business

Pressure on Germany as energy crunch revives EU divisions over joint debt

[October 04, 2022] By Jan Strupczewski and Gabriela Baczynska

BRUSSELS (Reuters) - Two top European Union officials on Tuesday called for joint borrowing to help the 27-nation bloc navigate the energy crunch together, after Germany faced criticism for going its own way with huge subsidies its peers could never afford.

The energy price crisis - aggravated by Russia slashing gas supplies to the EU following Western sanctions over Moscow's war against Ukraine - is threatening recession in Europe as it recovers from the COVID pandemic.

Scrambling to respond, EU leaders are set to ask the bloc's executive arm on Friday to work out how to tackle soaring inflation through a cap on gas prices, funding by joint borrowing.

But Germany, Denmark and the Netherlands have opposed a price cap, citing concerns over security of supply. They are also against joint borrowing - an echo of the EU's long-standing divisions that have come to surface again over the twin energy and inflation crises.

Germany has instead raised eyebrows by announcing a massive 200 billion euro ($197.9 billion) support package for its businesses and households, dwarfing aid announced by other major EU economies - 67 billion euros in the case of France, and 68 billion euros in Italy.

"It's good to look more at the German state aid while discussing the EU price cap. They owe us here. Either the cap, or something sensible on joint gas purchases or on shared financing," said one EU diplomat.

The head of the EU executive, European Commission President Ursula von der Leyen, warned last week that any emergency measures must not damage the bloc's single market and that it was "paramount" to keep a level playing field.

On Tuesday two of her team - European Economic Commissioner Paolo Gentiloni and Internal Market Commissioner Thierry Breton - went further, saying new joint borrowing could follow the model of shared debt issued in the pandemic to subsidise jobs.

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European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, September 28, 2022. REUTERS/Yves Herman

RACE FOR SUBSIDIES

"It is more important than ever that we avoid fragmenting the internal market, setting up a race for subsidies and calling into question the principles of solidarity and unity that underpin our European project," the two wrote in an op-ed in the Irish Times.

"There is only one possible response: that of a Europe of solidarity. In order to overcome the fault lines caused by the different margins of manoeuvre of national budgets, we must think about mutualised tools at the European level."

As a model, they pointed to the bloc's pandemic jobs scheme SURE, under which the EU jointly borrowed 100 billion euros at very low cost and lent the money - rather than handing it out for free - to governments to save jobs.

France sided with that, saying a shared EU economic response was needed. But Germany quickly reiterated its opposition to sharing debt, saying that would not in the long run help competitiveness or financial sustainability of countries.

Denmark and the Netherlands are also strongly against joint debt, as they had been during 2020 negotiations on EU stimulus to lift economies from the COVID malaise.

Finding an alternative collective solution may be the best way of avoiding that, a diplomat from that group of countries said. "Addressing energy prices in a European way would make the joint borrowing question retract a bit."

National EU leaders are expected to discuss the matter when they meet in Prague on Thursday and Friday.

($1 = 1.0141 euros)

(Additional reporting by Kate Abnett, Writing by Gabriela Baczynska, Editing by Jan Harvey)

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