European energy solidarity is both a necessity and an opportunity

If parts of Europe are cold and hungry while others are able to protect themselves, there will be a political backlash that could tear the EU apart. To prevent this, the EU needs to set up a European energy solidarity mechanism. 

Adding to pre-war pressures, Russia’s war against Ukraine and Putin’s weaponisation of Russian gas has destabilised the global energy market, driving up prices and creating supply bottlenecks, with severe consequences for Europe even before the extra demand of winter sets in. This crisis will most likely endure beyond winter when emptied 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 develop, it already looks already certain that energy bills for households and companies will rise, often to unaffordable levels, aggravated by the pressure from rising food prices.

While there ought 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. Consequently, governments all over the EU are putting schemes into action to cushion the blow, in part aiming to cap prices, in part providing direct support to some/all of the population and/or businesses. This is not only in recognition of the need and responsibility to help; governments know full well that there will be political and electoral consequences if they don’t manage to provide at least a minimum level of support.  

Distributional consequences of the energy affordability crisis

The distributional consequences of this energy affordability crisis are significant at the domestic level but also at 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 address the problem, for example, in terms of the fiscal space, they have at their disposal. 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%.

While there is some recognition that European energy solidarity is needed, not only within but also between member states, including in financial terms, so far, there seems to be no political will to take further measures, especially among the governments of economically stronger countries. This is despite the obvious and inevitable cross-border issues that arise from an integrated market, such as how to deal with the redistribution of any pan-European windfall gains or price and supply spillover effects. Any (inevitable) domestic interference in the energy market implicitly creates a cross-border allocation of costs, given Europe’s interdependence.

A winter of European discontent

These distributional effects imply political consequences at EU level. If in a situation of severe distress, when basic necessities such as food and energy become unaffordable in certain geographies or parts of society but not others, when populations see generous support schemes in some countries but not in others when repercussions and spillovers from the actions of some countries affect others negatively, the political backlash will be severe. The political upheaval would be aggravated by a moral dimension if countries that have made mistakes in the past that are now impacting everyone’s energy security and affordability, for example, Germany with Nord Stream 2, are not seen to be taking responsibility.

At its simplest level, if some parts of Europe are cold and hungry while others are not, the political backlash carries the high risk of tearing the European Union apart, undermining the basic premise of European integration: we are all in this together. Even if this does not happen in the short term, the consequences will be harsh, with every country then being incentivised to engage with the EU only if they see a direct financial gain, blocking most action, rendering the Union helpless to advance.

In it together?

This underlying political problem explains the strength of the reaction to Germany’s energy support package, worth a whopping €200 bn. to provide support measures and maintain the affordability of energy in Germany, which is seen as having been devised without consultation with other EU partners and without consideration of the negative cross-border spillovers. In response, Berlin has pointed to support packages elsewhere and emphasised that there is a willingness to consider more common EU action, for example, in the form of loan instruments being made available at EU level.

This should be seen as an opportunity: it is in Germany’s, and all other EU countries’ enlightened self-interest to put a European mechanism in place, not only because there is a need to supplement national responses, for example, state aid packages, with a European mechanism to avoid distortions and negative spillovers, but also to prevent any political backlash.

Parallels can be drawn with the EU’s reaction to the Covid-19 crisis, which was widely perceived as a positive moment in European integration. In the case of the pandemic, the European Recovery and Resilience Facility (RRF) effectively demonstrated solidarity while ensuring that countries like Germany could proceed with their national support packages. This response to the pandemic embodied a political bargain that signalled acceptance and permission of national measures as long as they were supplemented by an EU-level mechanism.

A European energy solidarity mechanism

The EU needs a financial European energy solidarity mechanism. Such a mechanism, Europe CARES (Common Allocation of Resources for European Solidarity), would differ from the RRF in many crucial aspects. It would need to be targeted not only at EU countries but also at accession countries in recognition of their common future with the EU. But it should exclude those EU and accession countries that are cushioning the blow by continuing their dependence on Russian energy.

The solidarity mechanism would be available to countries negatively affected by food and energy prices regardless of their income level, but it would require that those most able also contribute accordingly, even if they are among the ones most affected by the energy crisis. It is in the enlightened self-interest of all countries to create such a mechanism, to ensure the future of European cooperation, to maintain the alliance against Russia and to ensure that the economic foundation of the EU, the Single Market, is not fatally undermined by national actions, while still giving room to member state governments to counteract the crisis.

Europe CARES would 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 tools at national and EU level should be mobilised to enhance the resilience of our economies while preserving Europe’s global competitiveness and maintaining the level playing field and the integrity of the Single Market.”

Such an energy solidarity mechanism should not replace or be seen to replace the manifold actions the EU is currently taking to deal with the energy crisis, but rather be a necessary complement to them.

Europe CARES would not be an EU instrument but a parallel intergovernmental mechanism, like the European Stability Mechanism (ESM) or the fiscal compact. It would, therefore, not fall under the EU’s normal budgetary rules, which provide all EU member states with the right to veto the setup of such a mechanism or attached conditionalities. Importantly, it would have to be a real redistribution mechanism, providing direct budgetary support to governments, not on a loan basis. Its aim would be European energy solidarity, pure and simple, without complex disbursement rules and conditions of usage, aside from financing the relief packages provided by governments. A redistributive mechanism would have the advantage of being able to react quickly, rather than investment mechanisms that take a long time and are not effective immediate emergency instruments. While investments are undoubtedly, also needed, the immediate focus has to be to get through the winter of discontent.

Demonstrating that Europe CARES

Beyond need, Europe CARES should be clearly targeted, providing support to the most vulnerable, but avoiding negative spillover effects through, for example, the acceleration of supply bottlenecks if the funding were to be used to outbid others on the market. It should also be clear to citizens that this support is part of European energy solidarity. Europe CARES would thus have three principles for its disbursement:

• a focus on demonstrated NEED, available to those countries that are negatively affected by food and energy prices, not cushioned by continuing dependence on Russia;
• these countries would need to commit to TARGETED action, focused on those in the most severe need, aiming to minimise negative spillovers and cross-border market distortions, as well as taking action to carry out energy savings. The assessment could be carried out by a pan-European expert panel with support from the Commission, also making recommendations for how negative cross-border impacts could be minimised; and
• it would need to be COMMUNICATED clearly, to the beneficiaries that this is a European solidarity mechanism that recognises that we are all in this together.

Who pays?

In terms of funding, Europe CARES could be built up from national contributions, but it should go further than this. Any national or European mechanism that extracts windfall profits from energy companies or particular energy suppliers, such as Norway, could contribute to Europe CARES, potentially also involving such governments in the decisions on how to distribute the funds.

Similarly, EU countries could voluntarily dedicate any reimbursements of unused European funding to such a mechanism. It could also be a channel to direct European and international aid to some of the countries that need further support, including some of the accession countries, extending to Ukraine itself. It could also go beyond funding, looking at the allocation of scarce resources when there is an energy shortfall, despite sustained efforts to reduce energy usage and explore new sources of supply.

Turning a crisis into an opportunity

This is not an easy ask at a time when all countries are under pressure. But it should be seen as an opportunity. The challenges we are facing in Europe are common challenges, and only if we work together and show solidarity can we address them. Europe CARES would be a visible sign that we all recognise this basic truth. It would also carry a sting in the tail for those not willing to be part of Europe’s political consensus when it comes to Russia’s aggression, in effect limiting this solidarity mechanism to those who make energy sacrifices in the common struggle against Putin’s war.

It would turn a situation of existential challenge – some Europeans being hungry and cold while others are not – into an opportunity; by demonstrating solidarity and ensuring that no part of Europe has to be cold and hungry, it would strengthen European cooperation. It would prove to European governments and citizens that European integration is an essential part of the answer to the challenges we face, thus countering the political backlash that will otherwise inevitably follow. It is also the right thing to do, demonstrating that European countries not only protect their own citizens but act jointly to help everyone affected by this common challenge. In short, A Common Allocation of Resources for European Solidarity would show that Europe CARES.

Fabian Zuleeg is Chief Executive and Chief Economist at the European Policy Centre.

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