For the first time, the EU Commission has triggered the rule of law mechanism introduced in 2021. The budget cuts that Hungary now faces will hit the country hard, writes Eric Bonse. Public procurement will be particularly affected.
On the other hand, the proposal by EU Enlargement Commissioner Olivér Várhelyi to make right-wing liberal Pole Andrzej Sadoś the highest official in the Directorate General for Enlargement is off the table. Várhelyi is seen more as Viktor Orbán’s deputy than as a fiery defender of European values, writes Stephan Israel.
Like many countries in the EU, Portugal, and Spain are also plagued by high energy costs. The reason is the sharp rise in the price of gas, which is dragging up the price of electricity. The two countries have submitted a concept to the EU Commission with which they now want to limit the price of gas. Isabel Cuesta Camacho has analyzed the proposal.
Today the EU Parliament will vote on a resolution on sanctions against Russia. The fifth sanctions package is expected to include an embargo on oil and coal. Read more about this in the News.
Yesterday, the German cabinet passed an amendment to the Renewable Energy Sources Act. Read about the changes in tenders for renewable energies and eligible plants in other EU countries in the News.
Yesterday, the compromise on the Data Governance Act (DGA) was adopted by a large majority in the European Parliament and described as the “start of a digital policy turning point”. Read more about the DGA in the News.
It’s a first: Hungary is the first EU country to face a cut in its payments from the Community budget . The EU Commission confirmed in Brussels on Wednesday that it would trigger the new rule of law mechanism. The formal decision is planned for the first Commission meeting after the Easter break, Budget Commissioner Johannes Hahn said in an interview with Europe.Table and other European media.
The rule-of-law mechanism was adopted under the German EU presidency at the end of 2020 and introduced in January 2021. It allows EU funds to be cut after a multi-stage procedure. The government in Budapest spoke of a “mistake.” Orbán’s cabinet chief Gergely Gulyas called on the EU Commission “not to punish Hungarian voters for not expressing an opinion to the taste of Brussels in Sunday’s elections, which were clearly won by the ruling party.” Hungary should not be disadvantaged.
A lot of money is at stake for the country. In 2020, €4.6 billion more flowed to Hungary than was paid into the EU budget from there. Brussels is already withholding payments from the COVID-19 reconstruction fund. This involves about €7 billion. Hahn said the dispute with Hungary is mainly about public procurement. He expects a decision at the next meeting of the EU Commission, which will not take place until the end of April because of the Easter break.
Hungary then receives an official notification that formally triggers the rule of law mechanism. The government in Budapest must respond to this “notification,” and then the EU Commission again decides. If the concerns are not resolved, the EU authority submits a proposal to cut budget funds.
The Council of Ministers, which must decide by a qualified majority, has the final say. In total, the procedure will take six to nine months, Hahn said. Orbán therefore still has a grace period until the fall. After that, things could get serious. Trouble is already looming over Ukraine policy. Hungary does not want to support the EU Commission’s planned tightening of sanctions against Russia. The expansion of import restrictions on oil and gas from Russia is a red line for him, Prime Minister Orbán said in Budapest on Wednesday.
He also expressed his willingness to pay for gas supplies in rubles – as demanded by Russia. Other EU states, such as Germany, reject this and want to continue paying their bills in euros or dollars. Hungary’s Foreign Minister Peter Szijjarto added that the country’s gas supply is regulated by a contract with the state-owned MVM and the Russian corporation Gazprom. The EU plays no role in this contract. In his view, a joint position of the EU states importing Russian gas is not necessary.
An appeal to stick to the common European line came from Germany this afternoon. German Economics Minister Robert Habeck recalled that the EU states had endorsed the decision of the G7 energy ministers to continue paying for gas supplies in the currencies agreed in the contracts with Russia.
This decision “has a very strong, binding effect on the countries that participate in the sanctions, and I hope that this binding effect remains so strong that people don’t back out,” Habeck told reporters in Berlin. Asked about the consequences if Hungary implements its announcement on ruble payments, Habeck said, “That isolates Hungary.” With Manuel Berkel
The sensitive personnel matter at the top of the Directorate-General for Enlargement (NEAR) set alarm bells ringing. Enlargement Commissioner Olivér Várhelyi wanted to make Poland’s EU Ambassador Andrzej Sadoś his highest official, it was said in Brussels’ European Quarter and in the EU Parliament in Strasbourg just a few weeks ago. Not only are the two men friends; both are also firmly in line with their right-wing liberal governments.
This is less surprising in the case of Poland’s Permanent Representative. Olivér Várhelyi, on the other hand, would actually be committed to the European cause as an EU Commissioner, but since taking office he has not emancipated himself an inch from Budapest and is regarded in Brussels as Viktor Orbán’s deputy.
Of all things, the enlargement portfolio would definitely have become a haven for illiberal democracy. The department was supposed to introduce the accession candidates to basic European values such as the rule of law, independent media, and democratic standards.
Now, at least on this front, there is an all-clear, the worst fears in the apparatus do not come true. Olivér Várhelyi is reportedly unable to push through his dream appointment. The episode is typical of the Hungarian EU Commissioner. In his own cabinet, the 50-year-old relies on a small circle of staff.
He is regarded as suspicious and already had a reputation as a cynic in his previous post as Hungary’s EU ambassador, publicly excoriating disagreeable staff. He has no allies in the college under Commission President Ursula von der Leyen. He is isolated, and many would rather avoid him, says one person who knows him: “It’s not that he’s everyone’s favorite, on the contrary.”
Staff appointments at the level of Director General must be approved by the College. There, people were already irritated that Várhelyi had the job advertised externally. Otherwise, top posts are usually filled internally. Maciej Popowski, who has been in office practically since the beginning of the legislative period, is expected to have good chances. The current Director-General also comes from Poland, but is close to the opposition there. Deputy Director-General Katarina Mathernova, a Slovakian, is also said to be in the running.
Either way, cooperation is not likely to be easy. The climate under Olivér Várhelyi is at a low point. The directors for the Western Balkans or the Southern Neighborhood and Turkey also have only executive appointments. Recently, there were hardly any applications for job advertisements at lower levels in the departments for Serbia, Bosnia, or Montenegro. Those who stayed were said to be demotivated. The Directorate General NEAR recently had to hand over a number of posts to other departments.
However, that was before Ukraine, Georgia and Moldova submitted their applications for membership. Actually, now would be a good time to raise the profile of an enlargement commissioner. Olivér Várhelyi, however, is sticking strictly to the agenda of his mentor Viktor Orbán. Advancing northern Macedonia’s blocked application for membership? Not interested. Orbán’s sympathies belong to Nikola Gruevski, a former nationalist head of government of northern Macedonia, sentenced to prison for corruption at home and now a “political refugee” in Budapest.
When Olivér Várhelyi travels to Israel, as he did recently, he naturally poses there with opposition leader Benjamin Nethanyahu, another Orbán ally. The absolute priority, however, is to advance Serbia and its accession process. Orbán and Serbia’s newly re-elected President Aleksandar Vučić are pursuing a similar seesaw policy between Brussels and Moscow.
Unforgotten in Brussels was the episode last year when Olivér Várhelyi instructed his cabinet to water down his own people’s progress report on Serbia and criticize backward steps in the rule of law or media freedom. The liberal Belgian Didier Reynders, EU Commissioner for Justice and the Rule of Law, countered this, and since then there has been no more talk between the Várhelyi and Reynders cabinets, according to reports.
The enlargement commissioner is also pursuing the Hungarian agenda in Bosnia-Herzegovina, where he is supposed to support Milorad Dodik, currently a member of the three-member state presidency. Dodik is sabotaging the Bosnian central state by all means and is threatening the secession of the so-called Republika Srpska.
An internal EU document seems to substantiate the accusations. 30 EU parliamentarians from various political groups called on the Commission President to investigate the accusations. Ursula von der Leyen has repeatedly expressed her confidence in her Enlargement Commissioner and has now also rejected the accusations. Observers see the reluctance in the fact that von der Leyen was finally elected Commission President in 2019 also with the votes of Orbán’s ruling party.
At the recent EU summit, after lengthy discussions, Spain and Portugal succeeded in obtaining an exemption from the rules of the European electricity market. The two governments have since sent a concept to Brussels on how they intend to prevent the sharp rise in gas prices from pulling up the price of electricity. The proposal, which still has to be approved by the European Commission, is to limit the gas price for power generation plants to a maximum of €30 per megawatt-hour.
The document is an initial proposal that will be discussed further with Brussels, a spokesman for the Ministry of Ecological Restructuring in Madrid told Europe.Table. The measure could reduce the price of electricity to €120 to €130 per megawatt-hour, less than half the average price in March of €284.
The price cap of €30 per megawatt-hour would apply to gas-fired power plants producing electricity for consumers in Spain and Portugal. To avoid market distortions beyond the Iberian Peninsula, both the gas price for the other sectors and the electricity price on the wholesale market, which also applies to interconnection with the rest of Europe, would remain untouched.
In this way, the governments want to prevent expensive gas from pulling up electricity prices. Electricity has become five times more expensive because of the impact of the gas crisis, although neither demand nor the energy mix has changed, the ministry spokesman said. “We need to prevent the entire price of electricity from being determined by the price of gas, which we believe is a flaw in the energy market design.” Under EU rules, natural gas, as the most expensive energy source, sets the reference value for the price of electricity.
If the company’s own concept worked, “other EU member states would also consider it,” the Minister for Ecological Restructuring, Teresa Ribera, told the newspaper El País. She expressed confidence that the EU Commission would approve the proposal. The measure is expected to take effect before May 1.
The price cap is not intended to burden public budgets. Rather, according to the two governments, the costs would be absorbed by the market itself. “Since it is a transitional system for a few months, it should not have a negative impact on the European market,” says José María Yusta, an expert on energy markets at the University of Zaragoza.
The difference between the price cap and the actual production costs of gas-fired power plants, estimated by the industry at an average of €250 per MWh, is ultimately to be borne by consumers. “Without a cap on the gas price, an average price of €250 will be charged for all power generation. By capping the gas price, only 20 percent of production will be charged €250, and 80 percent will be charged at the capped price,” explains the Spanish Ministry of Ecological Transformation. The measure thus involves removing gas from the pricing mechanism.
Both governments set the bar low with a maximum price of €30. In the negotiations with Brussels, the Commission could force Spain and Portugal to raise gas prices to around €50 or €70 so that the difference between the Iberian Peninsula and the other EU countries does not become too great.
EU Commission President Ursula von der Leyen said after the summit in late March that a possible reform of the electricity market design would be discussed at a later date. Germany and the Netherlands, in particular, had strictly opposed any change in the way the common energy market operates.
Madrid and Lisbon have been fighting for months to ensure that the two countries’ low level of energy connectivity is taken into account by the rest of the EU. “In terms of energy, the Iberian Peninsula is not really a peninsula, it’s an island,” Portuguese Prime Minister Antonio Costa said at the EU summit.
In addition, the share of renewable energy in both countries is quite high, at 60 percent in Portugal and 45 percent in Spain. Portugal does not rely on Russian gas at all, but uses only liquefied natural gas (LNG), which is supplied mainly from Algeria to its regasification plant in Sines. Russian gas imports to Spain reach just under ten percent.
Madrid and Lisbon are confident that the price cap for gas-fired power plants will automatically lead to lower electricity prices for consumers. In Portugal, the immediate impact is minimal, but in Spain, about 40 percent of households and businesses are suffering from prices. Social pressure in the country intensified in March with the truck drivers’ strike, which not only hampered food supplies but also brought several industries to a standstill. Some industries had to temporarily shut down their operations due to the high cost of electricity.
The next big test of the G20’s credibility will come when (or if) its finance ministers and central bank governors meet for the World Bank and International Monetary Fund spring meetings on April 18-24. As the leading forum for international economic policy cooperation today, the G20 will have a crowded agenda. Top-line issues include central bank responses to escalating global inflation; accumulating evidence of rapid climate change; and coordination of health and fiscal policy. But the bear in the room will be Russia’s brutal assault on Ukraine and its economic repercussions, starting with its effect on world food prices.
Despite some important achievements, several visible failures have undermined the G20’s credibility in recent years. During US President Donald Trump’s administration, G20 communiqués were regularly watered down to near meaninglessness. More recently, the group has failed to formulate an effective global response to COVID-19, let alone prepare for future pandemics.
The G20’s credibility is an important asset in a world of increasingly globalized challenges. But credibility is hard to build and easy to lose, which means this month’s meeting could be a watershed. So far, G20 members have approached the Ukraine crisis in very different ways, in terms of both public communications and policies. While the United States and its allies have responded with significant sanctions, China, India, and South Africa recently abstained from a United Nations General Assembly resolution criticizing Russia and demanding humanitarian access in Ukraine.
According to the sanctions tracker maintained by Chad P. Bown of the Peterson Institute for International Economics, eight G20 members (all the middle-income members) have publicly declared their non-participation in economic sanctions against Russia, and Saudi Arabia – a US ally that is a partner of Russia within OPEC+ – has proven similarly disinclined. It is thus apparent that the group will not reach a consensus even on how to describe Russia’s war or its effects on world markets. Yet to downplay Russia’s aggression in the interest of unanimity might erode the G20’s credibility beyond recovery.
In any case, the G20 is sure to weigh in on one prominent and direct repercussion of Russia’s invasion: a prospective fall in global food supply. Even before February 24, global food prices were approaching record highs, owing to a confluence of factors similar to those that generated food-price spikes in 2007-08 and 2010. Those earlier episodes led to widespread social instability in some poorer countries; with many low- and middle-income countries now also facing inflation pressures, higher debt levels, and continuing vulnerabilities to disease and climate change, the effects could be explosive.
Ukraine and Russia are top exporters of wheat, maize, and sunflower seeds and oil. According to the UN Food and Agriculture Organization’s recent projections, already-high food and feed prices could increase by 8-22% over the course of this year and next, owing to the destruction of Ukraine’s production, storage, and transport facilities, coupled with possible sanctions-related disruptions to Russia’s grain and fertilizer exports, elevated world energy prices, and higher shipping and insurance fees. As a result, the number of undernourished people worldwide could rise by 8-13 million.
As with previous food-price shocks, today’s crisis puts a premium on international policy coordination. Most importantly, as the FAO and the World Trade Organization have urged, the G20 must collectively reject beggar-thy-neighbor food export taxes or controls. These measures have already begun to proliferate, even though they produced massive increases in global food prices in the past.
But the G20 must not stop there. Calls for palliative measures can help, but unless they are accompanied by a frank discussion of root causes and remedies, they risk enabling bad behavior. The current threat to global food supplies has been exacerbated by a single G20 member’s aggressive war and other violations of international law. Russia could easily and unilaterally mitigate the crisis by ending its bloody assault, particularly its targeting of civilians and civilian infrastructure.
True, part of the global economic shock from the war is due to sanctions; but these would be scaled back were Russia to withdraw its forces and cease its bombardments. In the meantime, Saudi Arabia (along with the United Arab Emirates) could temper the surge in global energy prices by pumping more oil – something it has so far refused to do.
Although deep disagreements between G20 members are inevitable, the summit must go on, because canceling it at this point would be no less discrediting. The group must demonstrate that it is capable of confronting the realities of an uncomfortable situation. To that end, the bulk of the members should aim to draft and endorse a communiqué that candidly identifies Russia as the obvious source of both the problem and its remediation. This could be a simple statement of facts, free of language overtly condemning anyone.
Of course, Russia steadfastly refuses to acknowledge the facts, arguing that “a possible food crisis is provoked not by Russia’s special operation in Ukraine but by the West’s illegal unilateral sanctions.” But if a sizable share of G20 members signs onto the communiqué, a credible rump of countries that can support future multilateral cooperation would be preserved. It is better to let some countries bow out, if that is their wish, than to pretend a false unity exists.
G20 members, including Russia, are the key players influencing the global commons. It remains important that they communicate in all the key areas where they have influence, including food, health, and climate action. Unity on substantive issues, where it is possible, will advance the global commons. But fundamental disagreements can and should be publicly acknowledged so that subgroups of members can continue to pursue their own initiatives.
G20 members, including Russia, are the major players affecting the global commons. It is still important that they communicate in all the critical areas where they wield influence, including nutrition, health, and climate. Substantive agreement, where possible, will advance global welfare. But fundamental disagreement can and should be publicly acknowledged so that subsets of members can still pursue their own initiatives.
Translated from English by Jan Doolan. In cooperation with Project Syndicate, 2022.
For the first time, the EU Commission has triggered the rule of law mechanism introduced in 2021. The budget cuts that Hungary now faces will hit the country hard, writes Eric Bonse. Public procurement will be particularly affected.
On the other hand, the proposal by EU Enlargement Commissioner Olivér Várhelyi to make right-wing liberal Pole Andrzej Sadoś the highest official in the Directorate General for Enlargement is off the table. Várhelyi is seen more as Viktor Orbán’s deputy than as a fiery defender of European values, writes Stephan Israel.
Like many countries in the EU, Portugal, and Spain are also plagued by high energy costs. The reason is the sharp rise in the price of gas, which is dragging up the price of electricity. The two countries have submitted a concept to the EU Commission with which they now want to limit the price of gas. Isabel Cuesta Camacho has analyzed the proposal.
Today the EU Parliament will vote on a resolution on sanctions against Russia. The fifth sanctions package is expected to include an embargo on oil and coal. Read more about this in the News.
Yesterday, the German cabinet passed an amendment to the Renewable Energy Sources Act. Read about the changes in tenders for renewable energies and eligible plants in other EU countries in the News.
Yesterday, the compromise on the Data Governance Act (DGA) was adopted by a large majority in the European Parliament and described as the “start of a digital policy turning point”. Read more about the DGA in the News.
It’s a first: Hungary is the first EU country to face a cut in its payments from the Community budget . The EU Commission confirmed in Brussels on Wednesday that it would trigger the new rule of law mechanism. The formal decision is planned for the first Commission meeting after the Easter break, Budget Commissioner Johannes Hahn said in an interview with Europe.Table and other European media.
The rule-of-law mechanism was adopted under the German EU presidency at the end of 2020 and introduced in January 2021. It allows EU funds to be cut after a multi-stage procedure. The government in Budapest spoke of a “mistake.” Orbán’s cabinet chief Gergely Gulyas called on the EU Commission “not to punish Hungarian voters for not expressing an opinion to the taste of Brussels in Sunday’s elections, which were clearly won by the ruling party.” Hungary should not be disadvantaged.
A lot of money is at stake for the country. In 2020, €4.6 billion more flowed to Hungary than was paid into the EU budget from there. Brussels is already withholding payments from the COVID-19 reconstruction fund. This involves about €7 billion. Hahn said the dispute with Hungary is mainly about public procurement. He expects a decision at the next meeting of the EU Commission, which will not take place until the end of April because of the Easter break.
Hungary then receives an official notification that formally triggers the rule of law mechanism. The government in Budapest must respond to this “notification,” and then the EU Commission again decides. If the concerns are not resolved, the EU authority submits a proposal to cut budget funds.
The Council of Ministers, which must decide by a qualified majority, has the final say. In total, the procedure will take six to nine months, Hahn said. Orbán therefore still has a grace period until the fall. After that, things could get serious. Trouble is already looming over Ukraine policy. Hungary does not want to support the EU Commission’s planned tightening of sanctions against Russia. The expansion of import restrictions on oil and gas from Russia is a red line for him, Prime Minister Orbán said in Budapest on Wednesday.
He also expressed his willingness to pay for gas supplies in rubles – as demanded by Russia. Other EU states, such as Germany, reject this and want to continue paying their bills in euros or dollars. Hungary’s Foreign Minister Peter Szijjarto added that the country’s gas supply is regulated by a contract with the state-owned MVM and the Russian corporation Gazprom. The EU plays no role in this contract. In his view, a joint position of the EU states importing Russian gas is not necessary.
An appeal to stick to the common European line came from Germany this afternoon. German Economics Minister Robert Habeck recalled that the EU states had endorsed the decision of the G7 energy ministers to continue paying for gas supplies in the currencies agreed in the contracts with Russia.
This decision “has a very strong, binding effect on the countries that participate in the sanctions, and I hope that this binding effect remains so strong that people don’t back out,” Habeck told reporters in Berlin. Asked about the consequences if Hungary implements its announcement on ruble payments, Habeck said, “That isolates Hungary.” With Manuel Berkel
The sensitive personnel matter at the top of the Directorate-General for Enlargement (NEAR) set alarm bells ringing. Enlargement Commissioner Olivér Várhelyi wanted to make Poland’s EU Ambassador Andrzej Sadoś his highest official, it was said in Brussels’ European Quarter and in the EU Parliament in Strasbourg just a few weeks ago. Not only are the two men friends; both are also firmly in line with their right-wing liberal governments.
This is less surprising in the case of Poland’s Permanent Representative. Olivér Várhelyi, on the other hand, would actually be committed to the European cause as an EU Commissioner, but since taking office he has not emancipated himself an inch from Budapest and is regarded in Brussels as Viktor Orbán’s deputy.
Of all things, the enlargement portfolio would definitely have become a haven for illiberal democracy. The department was supposed to introduce the accession candidates to basic European values such as the rule of law, independent media, and democratic standards.
Now, at least on this front, there is an all-clear, the worst fears in the apparatus do not come true. Olivér Várhelyi is reportedly unable to push through his dream appointment. The episode is typical of the Hungarian EU Commissioner. In his own cabinet, the 50-year-old relies on a small circle of staff.
He is regarded as suspicious and already had a reputation as a cynic in his previous post as Hungary’s EU ambassador, publicly excoriating disagreeable staff. He has no allies in the college under Commission President Ursula von der Leyen. He is isolated, and many would rather avoid him, says one person who knows him: “It’s not that he’s everyone’s favorite, on the contrary.”
Staff appointments at the level of Director General must be approved by the College. There, people were already irritated that Várhelyi had the job advertised externally. Otherwise, top posts are usually filled internally. Maciej Popowski, who has been in office practically since the beginning of the legislative period, is expected to have good chances. The current Director-General also comes from Poland, but is close to the opposition there. Deputy Director-General Katarina Mathernova, a Slovakian, is also said to be in the running.
Either way, cooperation is not likely to be easy. The climate under Olivér Várhelyi is at a low point. The directors for the Western Balkans or the Southern Neighborhood and Turkey also have only executive appointments. Recently, there were hardly any applications for job advertisements at lower levels in the departments for Serbia, Bosnia, or Montenegro. Those who stayed were said to be demotivated. The Directorate General NEAR recently had to hand over a number of posts to other departments.
However, that was before Ukraine, Georgia and Moldova submitted their applications for membership. Actually, now would be a good time to raise the profile of an enlargement commissioner. Olivér Várhelyi, however, is sticking strictly to the agenda of his mentor Viktor Orbán. Advancing northern Macedonia’s blocked application for membership? Not interested. Orbán’s sympathies belong to Nikola Gruevski, a former nationalist head of government of northern Macedonia, sentenced to prison for corruption at home and now a “political refugee” in Budapest.
When Olivér Várhelyi travels to Israel, as he did recently, he naturally poses there with opposition leader Benjamin Nethanyahu, another Orbán ally. The absolute priority, however, is to advance Serbia and its accession process. Orbán and Serbia’s newly re-elected President Aleksandar Vučić are pursuing a similar seesaw policy between Brussels and Moscow.
Unforgotten in Brussels was the episode last year when Olivér Várhelyi instructed his cabinet to water down his own people’s progress report on Serbia and criticize backward steps in the rule of law or media freedom. The liberal Belgian Didier Reynders, EU Commissioner for Justice and the Rule of Law, countered this, and since then there has been no more talk between the Várhelyi and Reynders cabinets, according to reports.
The enlargement commissioner is also pursuing the Hungarian agenda in Bosnia-Herzegovina, where he is supposed to support Milorad Dodik, currently a member of the three-member state presidency. Dodik is sabotaging the Bosnian central state by all means and is threatening the secession of the so-called Republika Srpska.
An internal EU document seems to substantiate the accusations. 30 EU parliamentarians from various political groups called on the Commission President to investigate the accusations. Ursula von der Leyen has repeatedly expressed her confidence in her Enlargement Commissioner and has now also rejected the accusations. Observers see the reluctance in the fact that von der Leyen was finally elected Commission President in 2019 also with the votes of Orbán’s ruling party.
At the recent EU summit, after lengthy discussions, Spain and Portugal succeeded in obtaining an exemption from the rules of the European electricity market. The two governments have since sent a concept to Brussels on how they intend to prevent the sharp rise in gas prices from pulling up the price of electricity. The proposal, which still has to be approved by the European Commission, is to limit the gas price for power generation plants to a maximum of €30 per megawatt-hour.
The document is an initial proposal that will be discussed further with Brussels, a spokesman for the Ministry of Ecological Restructuring in Madrid told Europe.Table. The measure could reduce the price of electricity to €120 to €130 per megawatt-hour, less than half the average price in March of €284.
The price cap of €30 per megawatt-hour would apply to gas-fired power plants producing electricity for consumers in Spain and Portugal. To avoid market distortions beyond the Iberian Peninsula, both the gas price for the other sectors and the electricity price on the wholesale market, which also applies to interconnection with the rest of Europe, would remain untouched.
In this way, the governments want to prevent expensive gas from pulling up electricity prices. Electricity has become five times more expensive because of the impact of the gas crisis, although neither demand nor the energy mix has changed, the ministry spokesman said. “We need to prevent the entire price of electricity from being determined by the price of gas, which we believe is a flaw in the energy market design.” Under EU rules, natural gas, as the most expensive energy source, sets the reference value for the price of electricity.
If the company’s own concept worked, “other EU member states would also consider it,” the Minister for Ecological Restructuring, Teresa Ribera, told the newspaper El País. She expressed confidence that the EU Commission would approve the proposal. The measure is expected to take effect before May 1.
The price cap is not intended to burden public budgets. Rather, according to the two governments, the costs would be absorbed by the market itself. “Since it is a transitional system for a few months, it should not have a negative impact on the European market,” says José María Yusta, an expert on energy markets at the University of Zaragoza.
The difference between the price cap and the actual production costs of gas-fired power plants, estimated by the industry at an average of €250 per MWh, is ultimately to be borne by consumers. “Without a cap on the gas price, an average price of €250 will be charged for all power generation. By capping the gas price, only 20 percent of production will be charged €250, and 80 percent will be charged at the capped price,” explains the Spanish Ministry of Ecological Transformation. The measure thus involves removing gas from the pricing mechanism.
Both governments set the bar low with a maximum price of €30. In the negotiations with Brussels, the Commission could force Spain and Portugal to raise gas prices to around €50 or €70 so that the difference between the Iberian Peninsula and the other EU countries does not become too great.
EU Commission President Ursula von der Leyen said after the summit in late March that a possible reform of the electricity market design would be discussed at a later date. Germany and the Netherlands, in particular, had strictly opposed any change in the way the common energy market operates.
Madrid and Lisbon have been fighting for months to ensure that the two countries’ low level of energy connectivity is taken into account by the rest of the EU. “In terms of energy, the Iberian Peninsula is not really a peninsula, it’s an island,” Portuguese Prime Minister Antonio Costa said at the EU summit.
In addition, the share of renewable energy in both countries is quite high, at 60 percent in Portugal and 45 percent in Spain. Portugal does not rely on Russian gas at all, but uses only liquefied natural gas (LNG), which is supplied mainly from Algeria to its regasification plant in Sines. Russian gas imports to Spain reach just under ten percent.
Madrid and Lisbon are confident that the price cap for gas-fired power plants will automatically lead to lower electricity prices for consumers. In Portugal, the immediate impact is minimal, but in Spain, about 40 percent of households and businesses are suffering from prices. Social pressure in the country intensified in March with the truck drivers’ strike, which not only hampered food supplies but also brought several industries to a standstill. Some industries had to temporarily shut down their operations due to the high cost of electricity.
The next big test of the G20’s credibility will come when (or if) its finance ministers and central bank governors meet for the World Bank and International Monetary Fund spring meetings on April 18-24. As the leading forum for international economic policy cooperation today, the G20 will have a crowded agenda. Top-line issues include central bank responses to escalating global inflation; accumulating evidence of rapid climate change; and coordination of health and fiscal policy. But the bear in the room will be Russia’s brutal assault on Ukraine and its economic repercussions, starting with its effect on world food prices.
Despite some important achievements, several visible failures have undermined the G20’s credibility in recent years. During US President Donald Trump’s administration, G20 communiqués were regularly watered down to near meaninglessness. More recently, the group has failed to formulate an effective global response to COVID-19, let alone prepare for future pandemics.
The G20’s credibility is an important asset in a world of increasingly globalized challenges. But credibility is hard to build and easy to lose, which means this month’s meeting could be a watershed. So far, G20 members have approached the Ukraine crisis in very different ways, in terms of both public communications and policies. While the United States and its allies have responded with significant sanctions, China, India, and South Africa recently abstained from a United Nations General Assembly resolution criticizing Russia and demanding humanitarian access in Ukraine.
According to the sanctions tracker maintained by Chad P. Bown of the Peterson Institute for International Economics, eight G20 members (all the middle-income members) have publicly declared their non-participation in economic sanctions against Russia, and Saudi Arabia – a US ally that is a partner of Russia within OPEC+ – has proven similarly disinclined. It is thus apparent that the group will not reach a consensus even on how to describe Russia’s war or its effects on world markets. Yet to downplay Russia’s aggression in the interest of unanimity might erode the G20’s credibility beyond recovery.
In any case, the G20 is sure to weigh in on one prominent and direct repercussion of Russia’s invasion: a prospective fall in global food supply. Even before February 24, global food prices were approaching record highs, owing to a confluence of factors similar to those that generated food-price spikes in 2007-08 and 2010. Those earlier episodes led to widespread social instability in some poorer countries; with many low- and middle-income countries now also facing inflation pressures, higher debt levels, and continuing vulnerabilities to disease and climate change, the effects could be explosive.
Ukraine and Russia are top exporters of wheat, maize, and sunflower seeds and oil. According to the UN Food and Agriculture Organization’s recent projections, already-high food and feed prices could increase by 8-22% over the course of this year and next, owing to the destruction of Ukraine’s production, storage, and transport facilities, coupled with possible sanctions-related disruptions to Russia’s grain and fertilizer exports, elevated world energy prices, and higher shipping and insurance fees. As a result, the number of undernourished people worldwide could rise by 8-13 million.
As with previous food-price shocks, today’s crisis puts a premium on international policy coordination. Most importantly, as the FAO and the World Trade Organization have urged, the G20 must collectively reject beggar-thy-neighbor food export taxes or controls. These measures have already begun to proliferate, even though they produced massive increases in global food prices in the past.
But the G20 must not stop there. Calls for palliative measures can help, but unless they are accompanied by a frank discussion of root causes and remedies, they risk enabling bad behavior. The current threat to global food supplies has been exacerbated by a single G20 member’s aggressive war and other violations of international law. Russia could easily and unilaterally mitigate the crisis by ending its bloody assault, particularly its targeting of civilians and civilian infrastructure.
True, part of the global economic shock from the war is due to sanctions; but these would be scaled back were Russia to withdraw its forces and cease its bombardments. In the meantime, Saudi Arabia (along with the United Arab Emirates) could temper the surge in global energy prices by pumping more oil – something it has so far refused to do.
Although deep disagreements between G20 members are inevitable, the summit must go on, because canceling it at this point would be no less discrediting. The group must demonstrate that it is capable of confronting the realities of an uncomfortable situation. To that end, the bulk of the members should aim to draft and endorse a communiqué that candidly identifies Russia as the obvious source of both the problem and its remediation. This could be a simple statement of facts, free of language overtly condemning anyone.
Of course, Russia steadfastly refuses to acknowledge the facts, arguing that “a possible food crisis is provoked not by Russia’s special operation in Ukraine but by the West’s illegal unilateral sanctions.” But if a sizable share of G20 members signs onto the communiqué, a credible rump of countries that can support future multilateral cooperation would be preserved. It is better to let some countries bow out, if that is their wish, than to pretend a false unity exists.
G20 members, including Russia, are the key players influencing the global commons. It remains important that they communicate in all the key areas where they have influence, including food, health, and climate action. Unity on substantive issues, where it is possible, will advance the global commons. But fundamental disagreements can and should be publicly acknowledged so that subgroups of members can continue to pursue their own initiatives.
G20 members, including Russia, are the major players affecting the global commons. It is still important that they communicate in all the critical areas where they wield influence, including nutrition, health, and climate. Substantive agreement, where possible, will advance global welfare. But fundamental disagreement can and should be publicly acknowledged so that subsets of members can still pursue their own initiatives.
Translated from English by Jan Doolan. In cooperation with Project Syndicate, 2022.
