Yesterday, the Russian energy company Gazprom further curtailed gas deliveries via the Nord Stream 1 Baltic Sea pipeline. Economic Affairs Minister Robert Habeck suspects that the reasons given for the delays of the repairs of gas compressors may be a ruse and fears further reductions: “It may just be getting started,” he said in Berlin.
In Brussels yesterday, the EPP, S&D, and Renew were surprisingly quick to agree on a common position on emissions trading, border adjustment and the climate social fund – less than a week after the ETS package failed in plenary. Manuel Berkel looks at the details of what the MEPs agreed on.
Scholz, Macron, and Draghi are expected in Kyiv today. The visit will undoubtedly focus primarily on Ukraine’s accession to the EU. Here, France and Germany in particular must take a position, even if it will ultimately be a joint decision by all member states. In their Feature, Till Hoppe and Eric Bonse also look at Moldova and Georgia, which also want to start the process of joining the EU.
In today’s Opinion, Philipp Jäger and Nils Redeker of the Jacques Delors Centre explain why the EU must not pass on the costs of the REPowerEU program to the individual countries, but needs to develop a joint financing strategy. Indeed, the financing of this important program is a critical issue that remains unresolved.
I wish you an interesting read!
After sitting together until almost midnight, the negotiators were able to announce the result at midday on Wednesday after consulting with their political groups. Surprisingly quickly, EPP, S&D, and Renew agreed on a common position on the dossiers emissions trading, carbon border adjustment (CBAM) and Social Climate Fund. “It was important for us to get as big a majority as possible,” CBAM rapporteur Mohammed Chahim (S&D) told journalists and some lobbyists who had found a way into the video call.
Together, the three groups have 432 members – 79 more than would be required for a majority. The goal is to prevent another embarrassment in the plenum; next Wednesday, the deputies plan to vote again between 2 and 3 p.m. “I hope that we can negotiate with the Council starting next week,” Chahim said.
Plannability in emissions trading was probably too important to industry and trade unions for the large parliamentary groups to risk a hanging game. ENVI Chairman Pascal Canfin (Renew) was also relieved: “We will vote for the CO2 border tax and a historic acceleration of our climate policy!”
The Greens, who were left out of the compromise, announced yesterday that they still want to make changes before the vote on Wednesday – on market access for CO2 rights traders and the benchmarks for the allocation of free certificates. So even they no longer see any scope for influencing the big picture.
Under the compromise, emissions in the ETS are to be reduced by 63 percent by 2030 compared with 2005. Previously, the directive provided for 43 percent; the Commission wanted to increase the mark to 62 percent, and ENVI to 67 percent. Under the compromise now reached, the linear reduction factor for 2029 will also be increased minimally from 4.5 to 4.6 percent. In addition, 70 million allowances will be canceled once in the year after the directive comes into force, and then another 50 million allowances in 2026.
On free allocation of allowances, EPP and Renew showed movement. The compromise rejected last week would have provided for a phase-out in 2028 to 2034. Now, free allocations are to be cut from 2027 and phased out by 2032. However, the EPP stressed that it had put up a safety net for European industry. “We will only cancel the free allocations if the CBAM works in practice,” said EPP Vice Chair Esther de Lange. Free allocations should continue, she said, if border adjustment proves not to be WTO-compatible or if it is “harder to apply” than expected.
All sectors subject to emissions trading are now to be included in the border adjustment in the medium term. There is already consensus on the inclusion of hydrogen. For the inclusion of the production of plastics and organic chemicals, there will first be an evaluation by the Commission. It is important to have a sufficient data basis, de Lange explained. Collecting sufficient data on the CO2 intensity of various products is currently still a challenge.
“Climate protection is more important than political profiling – it is good that all sides have moved towards each other,” according to Tiemo Wölken, climate policy spokesman for the Socialist Group in the EU Parliament. “The result shows that it was right not to agree to the report last week, which would have decisively watered down emissions trading.”
Meanwhile, on Wednesday morning, ten member states called for further efforts on the Fit for 55 package. “We are looking with rising concern at the different calls to water down ambition across the files in the package – in both the Council and in the European Parliament,” the ministers wrote in an open letter. Even if individual changes appeared marginal, they would, in sum, jeopardize the climate protection target for 2030 and put the Union thereafter on a climate path that would be impossible to meet.
An ambitious agreement is also important to make the EU less dependent on Russian energy supplies. The letter was signed by Germany, Austria, Denmark, Sweden, Finland, Ireland, Spain, the Netherlands, Luxembourg, and Slovenia. In early April, the states had already published a similar letter on the climate protection package. Of the signatories at that time, Latvia is now missing from the new attempt.
Emmanuel Macron’s wording was cloistered, yet he conveyed a message: It was time to “send clear political signals to the Ukrainian people,” France’s president said yesterday alongside Romanian President Klaus Iohannis. At the subsequent meeting with his Moldovan counterpart Maia Sandu in Chisinau, he added: “I hope that we can give a clear answer on the issue of accession.” However, he said it was “virtually certain that this will be accompanied by conditions before it goes any further.”
Ukraine and Moldova, like Georgia, are pushing to join the EU. EU leaders must decide at the June 23-24 summit whether to pave the way and make the three countries candidates for membership. Macron now hinted that the leaders’ answer could be a “conditional yes”. Provided that all EU states go along – because unity is a prerequisite on this issue.
The EU Commission is expected to present its opinion on the applications of the three aspirants on Friday. Here, too, a “conditional yes” is on the horizon: “I expect the Commission to recommend that Ukraine be granted candidate status if it meets certain conditions,” says Nicolai von Ondarza, research group leader at the German Institute for International and Security Affairs (SWP). Moldova can probably count on a similar vote; Georgia’s is more doubtful.
However, the decision is made by the member states. Much depends here on how Germany and France position themselves. Countries such as Poland, Lithuania, Estonia, Latvia, and Ireland are calling for Ukraine to be granted candidate status at the summit. However, several other countries have expressed reservations, including the Netherlands, Denmark, and Portugal. However, they will not block the decision on their own, says a diplomat from one of the skeptical countries, and are waiting for clear signals from Berlin and Paris.
German Chancellor Olaf Scholz has expressed considerable reservations in recent weeks. However, it is unlikely that he will deny Kyiv candidate status. Given the difficult history, he can hardly travel to Kyiv without concrete commitments in his luggage – the echo would be devastating. He could promise President Volodymyr Zelenskiy the delivery of heavy weapons. However, there is more to suggest that Scholz, together with Macron and Italy’s Prime Minister Mario Draghi, will hold out the prospect of accession to Zelenskiy. The big question is to what extent.
His entourage has recently been very cagey about this. Talks are still underway, according to the SPD. The Social Democrats are quite sympathetic to Kyiv’s cause: “We want them in the European Union,” said party chairman Lars Klingbeil during a visit to Brussels at the beginning of the week.
Coalition partners are pressing Scholz. The Greens want to give Ukraine candidate status, but with conditions attached. The FDP is also in favor. Scholz could go along with the line.
The opposition in Berlin, for its part, senses an opportunity to drive the chancellor before it. The CDU/CSU parliamentary group in the Bundestag has prepared a motion calling for Ukraine, Moldova, and Georgia to be granted candidate status at the European Council. At the same time, the three countries should be given the prospect of opening the first chapters of their accession.
This is easy to call for in the opposition – although the wording also caused much debate in the ranks of parliamentary group leader Friedrich Merz. Scholz sees the risks: He warns against raising false expectations of rapid accession in Ukraine and does not want to snub the accession candidates in the Western Balkans.
Northern Macedonia and Albania, in particular, have taken big steps toward the EU but are still waiting for the start of accession negotiations – Bulgaria is blocking the process. Scholz is unlikely to give Kyiv the green light unless the government in Sofia clears the way for negotiations with North Macedonia at the EU summit at the latest.
Macron brings another model into play. In Chisinau, he explained that Moldova would probably not be granted candidate status under normal circumstances, but the situation is assessed differently because of Russia’s attack on Ukraine and destabilization. EU enlargement, however, could not be the only answer for stability on the continent.
Macron again promoted his proposal for a European Political Community as an alternative and precursor to EU membership. Yesterday, the French government fed a so-called non-paper into the Council, which somewhat fleshed out the concept.
Interested countries such as Ukraine could join the “Communauté Politique Européenne” (CPE) even before they become members of the EU. According to Paris, the CPE offers a more flexible framework and faster options for action than the small-scale and time-consuming EU accession procedure. The enlargement policy is therefore hardly suited to meet the “urgent historical and geopolitical requirements”.
The CPE could be used to strengthen ties with EU states in advance of EU accession and partially integrate the country into the single market, the paper says. It should be founded this year and be open to all countries that want to contribute “together to the security, stability, and prosperity of our continent”.
The French presidency stresses that the new community will not replace the Council of Europe, the OSCE, or NATO. It should have a lean structure and meet several times a year at the level of heads of state and government, but also at the ministerial level. The paper leaves open what competencies it will have.
According to France, the proposal was well received at a meeting of permanent representatives in Brussels yesterday. It was useful and timely, said an EU diplomat. Austria’s Chancellor Karl Nehammer has already praised the idea, calling it a “European preparatory space”. However, diplomats doubt the concept will be fleshed out at next week’s summit.
An SWP expert from Ondarza believes the Political Community could “change the discussion if it is seen as a strategy to bring candidate countries closer to the EU”. For this, however, the Central and Eastern European states would have to be involved. The fact that France, as a critic of EU enlargement, is the author of the proposal “triggers considerable mistrust there”. with Eric Bonse
European economic policymaking is currently particularly complicated. The Russian war of aggression against Ukraine is a heavy drag on growth, while inflation is rising rapidly. Spiraling energy prices require policy measures that cushion their impact without preventing companies and households from adapting to permanently higher fuel and electricity prices.
At the same time, the war necessitates new public expenditures – from bolstering the military, to humanitarian aid for refugees or the reconstruction of Ukraine – in a time in which governments had only just begun to cut back on their high spending to tackle the economic consequences of the pandemic.
Consequently, the EU currently has to juggle a whole new set of conflicting economic policy goals. Beyond many complicated trade-offs, however, the war also puts some objectives on the agenda that are beyond reproach. Two are particularly important. First, the EU must end its dependence on Russian energy imports as quickly and as comprehensively as possible. And secondly, it should achieve this primarily by investing massively in energy efficiency and the expansion of renewable energy.
First and foremost, energy independence is a geopolitical necessity. As long as the EU does not wean itself off Russian coal, oil and gas, Europe will continue to pour billions into the Russian war chest and remain geo-economically vulnerable. Ending the dependency from Russia by accelerating the deployment of renewables, at the same time, is good economic policy: It reduces dependence on fossil energy overall (not just from Russia), cuts European emissions, and in the long run lowers energy prices and thus imported inflation. The war confronts the EU with many difficult economic policy decisions. However, the massive expansion of investments in energy independence is not one of them.
In May, the EU Commission presented a plan on how to achieve this goal. With REPowerEU, it wants to reduce gas imports from Russia by two-thirds by the end of this year. By 2027, all Russian energy exports to the EU should be stopped completely. To achieve this, the primary focus is on accelerating the energy transition (the share of renewables is lifted from previously 40 percent across the EU by 2030 to 45 percent) and on energy savings through greater energy efficiency and lower consumption. To a lesser extent, the plan also includes investments in fossil infrastructure to circumvent Russian energy imports.
One can rightly argue over some of the details of the plan. Overall, however, the Commission proposal consists of many sensible measures, such as a platform for the joint procurement of natural gas, liquefied gas and hydrogen, a solar initiative, recommendations for simplifying approval procedures for renewable energies, or a foreign policy strategy for energy imports. So far, however, the plan lacks a convincing strategy on how the new goals are to be financed. In fact, energy independence does not come cheap.
According to the Commission’s estimate, the costs of REPowerEU amount to €300 billion by 2030. Of this sum, €210 billion would already have to be invested by 2027. Importantly, these sums are needed in addition to the funds that were already budgeted for reaching European climate goals before the war. Overall, the costs of energy independence through the energy transition are therefore much higher. But so far, hardly any new financial resources have been made available at EU level.
For the financing of REPowerEU, the Commission proposes on the one hand that member states voluntarily reallocate money from the cohesion funds and the EU agriculture budget. Moreover, by selling additional CO2 certificates, a small share, €20 billion, would be generated, channeled into to the Recovery and Resilience Facility (RRF) and allocated according to the key used during the pandemic. This is problematic for a whole range of reasons, not least because it would finance the acceleration of the energy transition by emitting additional CO2, and because the additional funds would primarily benefit those countries that were particularly affected by the economic fallout of the pandemic, a completely different crisis.
The largest part of the costs, about €225 billion, would be financed with RRF loans that are so far untapped. For this, member countries would have to borrow money from the EU and invest in specific projects to facilitate energy independence. For some member countries, these loans come with more favourable conditions than on the international financial markets. However, they fully count towards national debt and must be repaid in the long term. In summary, the financing side of the plan is, thus, currently based primarily on national spending. Whether this will work is questionable for at least three reasons.
First, energy independence is a common European good. Many investments required for REPowerEU have a European added value. However, their direct benefit for the countries in which they would have to take place is often small in the short term. For example, from a European perspective, new solar plants would be particularly worthwhile in Spain, according to the Commission. However, Spain itself is hardly dependent on Russian energy and would not only have to finance new solar plants, but also the grid infrastructure necessary to sell the new electricity to other, less sunny parts of the EU.
It is unlikely that Spain and other countries will undertake such investments to a sufficient degree, especially in connection with a second reason. National budgets are already under considerable pressure due to the economic consequences of the war. To cushion high energy prices, member states across Europe have already earmarked over €180 billion for relief packages. If prices remain high or rise further, these expenditures are bound to increase.
In addition, there will be a significant increase in spending on national defense budgets (announcements to date of €200 billion for the coming years, and rising), the costs of taking in refugees (Bruegel estimates €43 billion for 2022 alone) and the financial repercussions of the pandemic. How much the war will cost Europe in the end remains difficult to estimate. However, given this context, it is already clear that new, long-term investments in green energy independence will compete in national budgetary plans with other pressing expenditures.
And third, achieving energy independence is much more difficult for some member states than for others. For one, some member states are much more dependent on Russian energy than others. While France, for example, imported less than 10% of its energy from Russia before the war, it was more than half for Slovakia or Hungary, and about a quarter in the Czech Republic. On the other hand, some member states are currently suffering much more from the direct economic consequences of the war.
In particular, many Eastern European member states are narrowly avoiding a recession, even in more optimistic forecasts, and are also much more affected by high energy prices and energy poverty, compared to some countries in Western and Southern Europe. In these countries, investing sufficiently in green energy independence will prove particularly difficult.
To achieve the goals set in REPowerEU, the EU can, therefore, not rely primarily on national funding. Common European goals need common financing. Without additional funds, this can hardly be achieved. The funds of the EU budget are generally limited and its margins are already practically exhausted, in part for additional spending on humanitarian support for Ukrainian refugees. The next regular EU budget will not enter into force until 2028, much too late for the investments needed now. And the existing RRF grants have already been allocated and earmarked. New expenditures in energy independence could only be financed via existing RRF grants at the expense of investments that have already been approved, many of which were planned for the European energy transition anyway.
This leaves two options for the joint financing of energy independence. Either member states increase their contributions to the current EU budget. Should they not be willing to do so, the legal framework for taking on common debt could be utilized. This was first done during the pandemic, and against the backdrop of the deepest geopolitical crisis of recent decades, it could be employed once again. The political hurdles for both paths are high. But without joint financing, the EU will not succeed in implementing the urgently needed investments in energy independence. And this Europe cannot afford, neither geopolitically nor economically.
Yesterday, the Russian energy company Gazprom further curtailed gas deliveries via the Nord Stream 1 Baltic Sea pipeline. Economic Affairs Minister Robert Habeck suspects that the reasons given for the delays of the repairs of gas compressors may be a ruse and fears further reductions: “It may just be getting started,” he said in Berlin.
In Brussels yesterday, the EPP, S&D, and Renew were surprisingly quick to agree on a common position on emissions trading, border adjustment and the climate social fund – less than a week after the ETS package failed in plenary. Manuel Berkel looks at the details of what the MEPs agreed on.
Scholz, Macron, and Draghi are expected in Kyiv today. The visit will undoubtedly focus primarily on Ukraine’s accession to the EU. Here, France and Germany in particular must take a position, even if it will ultimately be a joint decision by all member states. In their Feature, Till Hoppe and Eric Bonse also look at Moldova and Georgia, which also want to start the process of joining the EU.
In today’s Opinion, Philipp Jäger and Nils Redeker of the Jacques Delors Centre explain why the EU must not pass on the costs of the REPowerEU program to the individual countries, but needs to develop a joint financing strategy. Indeed, the financing of this important program is a critical issue that remains unresolved.
I wish you an interesting read!
After sitting together until almost midnight, the negotiators were able to announce the result at midday on Wednesday after consulting with their political groups. Surprisingly quickly, EPP, S&D, and Renew agreed on a common position on the dossiers emissions trading, carbon border adjustment (CBAM) and Social Climate Fund. “It was important for us to get as big a majority as possible,” CBAM rapporteur Mohammed Chahim (S&D) told journalists and some lobbyists who had found a way into the video call.
Together, the three groups have 432 members – 79 more than would be required for a majority. The goal is to prevent another embarrassment in the plenum; next Wednesday, the deputies plan to vote again between 2 and 3 p.m. “I hope that we can negotiate with the Council starting next week,” Chahim said.
Plannability in emissions trading was probably too important to industry and trade unions for the large parliamentary groups to risk a hanging game. ENVI Chairman Pascal Canfin (Renew) was also relieved: “We will vote for the CO2 border tax and a historic acceleration of our climate policy!”
The Greens, who were left out of the compromise, announced yesterday that they still want to make changes before the vote on Wednesday – on market access for CO2 rights traders and the benchmarks for the allocation of free certificates. So even they no longer see any scope for influencing the big picture.
Under the compromise, emissions in the ETS are to be reduced by 63 percent by 2030 compared with 2005. Previously, the directive provided for 43 percent; the Commission wanted to increase the mark to 62 percent, and ENVI to 67 percent. Under the compromise now reached, the linear reduction factor for 2029 will also be increased minimally from 4.5 to 4.6 percent. In addition, 70 million allowances will be canceled once in the year after the directive comes into force, and then another 50 million allowances in 2026.
On free allocation of allowances, EPP and Renew showed movement. The compromise rejected last week would have provided for a phase-out in 2028 to 2034. Now, free allocations are to be cut from 2027 and phased out by 2032. However, the EPP stressed that it had put up a safety net for European industry. “We will only cancel the free allocations if the CBAM works in practice,” said EPP Vice Chair Esther de Lange. Free allocations should continue, she said, if border adjustment proves not to be WTO-compatible or if it is “harder to apply” than expected.
All sectors subject to emissions trading are now to be included in the border adjustment in the medium term. There is already consensus on the inclusion of hydrogen. For the inclusion of the production of plastics and organic chemicals, there will first be an evaluation by the Commission. It is important to have a sufficient data basis, de Lange explained. Collecting sufficient data on the CO2 intensity of various products is currently still a challenge.
“Climate protection is more important than political profiling – it is good that all sides have moved towards each other,” according to Tiemo Wölken, climate policy spokesman for the Socialist Group in the EU Parliament. “The result shows that it was right not to agree to the report last week, which would have decisively watered down emissions trading.”
Meanwhile, on Wednesday morning, ten member states called for further efforts on the Fit for 55 package. “We are looking with rising concern at the different calls to water down ambition across the files in the package – in both the Council and in the European Parliament,” the ministers wrote in an open letter. Even if individual changes appeared marginal, they would, in sum, jeopardize the climate protection target for 2030 and put the Union thereafter on a climate path that would be impossible to meet.
An ambitious agreement is also important to make the EU less dependent on Russian energy supplies. The letter was signed by Germany, Austria, Denmark, Sweden, Finland, Ireland, Spain, the Netherlands, Luxembourg, and Slovenia. In early April, the states had already published a similar letter on the climate protection package. Of the signatories at that time, Latvia is now missing from the new attempt.
Emmanuel Macron’s wording was cloistered, yet he conveyed a message: It was time to “send clear political signals to the Ukrainian people,” France’s president said yesterday alongside Romanian President Klaus Iohannis. At the subsequent meeting with his Moldovan counterpart Maia Sandu in Chisinau, he added: “I hope that we can give a clear answer on the issue of accession.” However, he said it was “virtually certain that this will be accompanied by conditions before it goes any further.”
Ukraine and Moldova, like Georgia, are pushing to join the EU. EU leaders must decide at the June 23-24 summit whether to pave the way and make the three countries candidates for membership. Macron now hinted that the leaders’ answer could be a “conditional yes”. Provided that all EU states go along – because unity is a prerequisite on this issue.
The EU Commission is expected to present its opinion on the applications of the three aspirants on Friday. Here, too, a “conditional yes” is on the horizon: “I expect the Commission to recommend that Ukraine be granted candidate status if it meets certain conditions,” says Nicolai von Ondarza, research group leader at the German Institute for International and Security Affairs (SWP). Moldova can probably count on a similar vote; Georgia’s is more doubtful.
However, the decision is made by the member states. Much depends here on how Germany and France position themselves. Countries such as Poland, Lithuania, Estonia, Latvia, and Ireland are calling for Ukraine to be granted candidate status at the summit. However, several other countries have expressed reservations, including the Netherlands, Denmark, and Portugal. However, they will not block the decision on their own, says a diplomat from one of the skeptical countries, and are waiting for clear signals from Berlin and Paris.
German Chancellor Olaf Scholz has expressed considerable reservations in recent weeks. However, it is unlikely that he will deny Kyiv candidate status. Given the difficult history, he can hardly travel to Kyiv without concrete commitments in his luggage – the echo would be devastating. He could promise President Volodymyr Zelenskiy the delivery of heavy weapons. However, there is more to suggest that Scholz, together with Macron and Italy’s Prime Minister Mario Draghi, will hold out the prospect of accession to Zelenskiy. The big question is to what extent.
His entourage has recently been very cagey about this. Talks are still underway, according to the SPD. The Social Democrats are quite sympathetic to Kyiv’s cause: “We want them in the European Union,” said party chairman Lars Klingbeil during a visit to Brussels at the beginning of the week.
Coalition partners are pressing Scholz. The Greens want to give Ukraine candidate status, but with conditions attached. The FDP is also in favor. Scholz could go along with the line.
The opposition in Berlin, for its part, senses an opportunity to drive the chancellor before it. The CDU/CSU parliamentary group in the Bundestag has prepared a motion calling for Ukraine, Moldova, and Georgia to be granted candidate status at the European Council. At the same time, the three countries should be given the prospect of opening the first chapters of their accession.
This is easy to call for in the opposition – although the wording also caused much debate in the ranks of parliamentary group leader Friedrich Merz. Scholz sees the risks: He warns against raising false expectations of rapid accession in Ukraine and does not want to snub the accession candidates in the Western Balkans.
Northern Macedonia and Albania, in particular, have taken big steps toward the EU but are still waiting for the start of accession negotiations – Bulgaria is blocking the process. Scholz is unlikely to give Kyiv the green light unless the government in Sofia clears the way for negotiations with North Macedonia at the EU summit at the latest.
Macron brings another model into play. In Chisinau, he explained that Moldova would probably not be granted candidate status under normal circumstances, but the situation is assessed differently because of Russia’s attack on Ukraine and destabilization. EU enlargement, however, could not be the only answer for stability on the continent.
Macron again promoted his proposal for a European Political Community as an alternative and precursor to EU membership. Yesterday, the French government fed a so-called non-paper into the Council, which somewhat fleshed out the concept.
Interested countries such as Ukraine could join the “Communauté Politique Européenne” (CPE) even before they become members of the EU. According to Paris, the CPE offers a more flexible framework and faster options for action than the small-scale and time-consuming EU accession procedure. The enlargement policy is therefore hardly suited to meet the “urgent historical and geopolitical requirements”.
The CPE could be used to strengthen ties with EU states in advance of EU accession and partially integrate the country into the single market, the paper says. It should be founded this year and be open to all countries that want to contribute “together to the security, stability, and prosperity of our continent”.
The French presidency stresses that the new community will not replace the Council of Europe, the OSCE, or NATO. It should have a lean structure and meet several times a year at the level of heads of state and government, but also at the ministerial level. The paper leaves open what competencies it will have.
According to France, the proposal was well received at a meeting of permanent representatives in Brussels yesterday. It was useful and timely, said an EU diplomat. Austria’s Chancellor Karl Nehammer has already praised the idea, calling it a “European preparatory space”. However, diplomats doubt the concept will be fleshed out at next week’s summit.
An SWP expert from Ondarza believes the Political Community could “change the discussion if it is seen as a strategy to bring candidate countries closer to the EU”. For this, however, the Central and Eastern European states would have to be involved. The fact that France, as a critic of EU enlargement, is the author of the proposal “triggers considerable mistrust there”. with Eric Bonse
European economic policymaking is currently particularly complicated. The Russian war of aggression against Ukraine is a heavy drag on growth, while inflation is rising rapidly. Spiraling energy prices require policy measures that cushion their impact without preventing companies and households from adapting to permanently higher fuel and electricity prices.
At the same time, the war necessitates new public expenditures – from bolstering the military, to humanitarian aid for refugees or the reconstruction of Ukraine – in a time in which governments had only just begun to cut back on their high spending to tackle the economic consequences of the pandemic.
Consequently, the EU currently has to juggle a whole new set of conflicting economic policy goals. Beyond many complicated trade-offs, however, the war also puts some objectives on the agenda that are beyond reproach. Two are particularly important. First, the EU must end its dependence on Russian energy imports as quickly and as comprehensively as possible. And secondly, it should achieve this primarily by investing massively in energy efficiency and the expansion of renewable energy.
First and foremost, energy independence is a geopolitical necessity. As long as the EU does not wean itself off Russian coal, oil and gas, Europe will continue to pour billions into the Russian war chest and remain geo-economically vulnerable. Ending the dependency from Russia by accelerating the deployment of renewables, at the same time, is good economic policy: It reduces dependence on fossil energy overall (not just from Russia), cuts European emissions, and in the long run lowers energy prices and thus imported inflation. The war confronts the EU with many difficult economic policy decisions. However, the massive expansion of investments in energy independence is not one of them.
In May, the EU Commission presented a plan on how to achieve this goal. With REPowerEU, it wants to reduce gas imports from Russia by two-thirds by the end of this year. By 2027, all Russian energy exports to the EU should be stopped completely. To achieve this, the primary focus is on accelerating the energy transition (the share of renewables is lifted from previously 40 percent across the EU by 2030 to 45 percent) and on energy savings through greater energy efficiency and lower consumption. To a lesser extent, the plan also includes investments in fossil infrastructure to circumvent Russian energy imports.
One can rightly argue over some of the details of the plan. Overall, however, the Commission proposal consists of many sensible measures, such as a platform for the joint procurement of natural gas, liquefied gas and hydrogen, a solar initiative, recommendations for simplifying approval procedures for renewable energies, or a foreign policy strategy for energy imports. So far, however, the plan lacks a convincing strategy on how the new goals are to be financed. In fact, energy independence does not come cheap.
According to the Commission’s estimate, the costs of REPowerEU amount to €300 billion by 2030. Of this sum, €210 billion would already have to be invested by 2027. Importantly, these sums are needed in addition to the funds that were already budgeted for reaching European climate goals before the war. Overall, the costs of energy independence through the energy transition are therefore much higher. But so far, hardly any new financial resources have been made available at EU level.
For the financing of REPowerEU, the Commission proposes on the one hand that member states voluntarily reallocate money from the cohesion funds and the EU agriculture budget. Moreover, by selling additional CO2 certificates, a small share, €20 billion, would be generated, channeled into to the Recovery and Resilience Facility (RRF) and allocated according to the key used during the pandemic. This is problematic for a whole range of reasons, not least because it would finance the acceleration of the energy transition by emitting additional CO2, and because the additional funds would primarily benefit those countries that were particularly affected by the economic fallout of the pandemic, a completely different crisis.
The largest part of the costs, about €225 billion, would be financed with RRF loans that are so far untapped. For this, member countries would have to borrow money from the EU and invest in specific projects to facilitate energy independence. For some member countries, these loans come with more favourable conditions than on the international financial markets. However, they fully count towards national debt and must be repaid in the long term. In summary, the financing side of the plan is, thus, currently based primarily on national spending. Whether this will work is questionable for at least three reasons.
First, energy independence is a common European good. Many investments required for REPowerEU have a European added value. However, their direct benefit for the countries in which they would have to take place is often small in the short term. For example, from a European perspective, new solar plants would be particularly worthwhile in Spain, according to the Commission. However, Spain itself is hardly dependent on Russian energy and would not only have to finance new solar plants, but also the grid infrastructure necessary to sell the new electricity to other, less sunny parts of the EU.
It is unlikely that Spain and other countries will undertake such investments to a sufficient degree, especially in connection with a second reason. National budgets are already under considerable pressure due to the economic consequences of the war. To cushion high energy prices, member states across Europe have already earmarked over €180 billion for relief packages. If prices remain high or rise further, these expenditures are bound to increase.
In addition, there will be a significant increase in spending on national defense budgets (announcements to date of €200 billion for the coming years, and rising), the costs of taking in refugees (Bruegel estimates €43 billion for 2022 alone) and the financial repercussions of the pandemic. How much the war will cost Europe in the end remains difficult to estimate. However, given this context, it is already clear that new, long-term investments in green energy independence will compete in national budgetary plans with other pressing expenditures.
And third, achieving energy independence is much more difficult for some member states than for others. For one, some member states are much more dependent on Russian energy than others. While France, for example, imported less than 10% of its energy from Russia before the war, it was more than half for Slovakia or Hungary, and about a quarter in the Czech Republic. On the other hand, some member states are currently suffering much more from the direct economic consequences of the war.
In particular, many Eastern European member states are narrowly avoiding a recession, even in more optimistic forecasts, and are also much more affected by high energy prices and energy poverty, compared to some countries in Western and Southern Europe. In these countries, investing sufficiently in green energy independence will prove particularly difficult.
To achieve the goals set in REPowerEU, the EU can, therefore, not rely primarily on national funding. Common European goals need common financing. Without additional funds, this can hardly be achieved. The funds of the EU budget are generally limited and its margins are already practically exhausted, in part for additional spending on humanitarian support for Ukrainian refugees. The next regular EU budget will not enter into force until 2028, much too late for the investments needed now. And the existing RRF grants have already been allocated and earmarked. New expenditures in energy independence could only be financed via existing RRF grants at the expense of investments that have already been approved, many of which were planned for the European energy transition anyway.
This leaves two options for the joint financing of energy independence. Either member states increase their contributions to the current EU budget. Should they not be willing to do so, the legal framework for taking on common debt could be utilized. This was first done during the pandemic, and against the backdrop of the deepest geopolitical crisis of recent decades, it could be employed once again. The political hurdles for both paths are high. But without joint financing, the EU will not succeed in implementing the urgently needed investments in energy independence. And this Europe cannot afford, neither geopolitically nor economically.
