Saving gas + Energy partnership with UK? • Table.Briefings

Dear reader,

The EU’s winter plan was the subject of our first Table.Live briefing yesterday. The basic idea is to harvest the low-hanging fruits in all EU countries, according to management consultant Jens Völler. However, if export bans on gas take hold, as they have in Hungary, “then we’ll have a problem on a scale we can’t even imagine yet,” warned Lion Hirth of the Hertie School. Manuel Berkel writes about the live briefing and the latest developments in the gas crisis.

Cooperation between the EU and the UK in the event of a gas emergency is also open to development – at least that is the view of the House of Lords Economic Affairs Committee. The argumentation: The UK has LNG export capacities that could help the EU in an emergency, while the EU has gas storage facilities the UK could benefit from. Therefore, the British government should “urgently” reach a binding agreement with the EU on emergency energy supply. Read more in the News.

For months, Hungary’s Prime Minister Viktor Orbán has been defying important decisions at the EU level. But his destructive behavior could have consequences; Commission President Ursula von der Leyen now seems determined to use the EU’s financial leverage against Hungary. The lack of funds would hit the country’s economy hard. Accordingly, the Commission sees itself as having the upper hands. The EU Budget Commissioner responsible, Johannes Hahn, expects a “constructive solution”, as Till Hoppe and Hans-Peter Siebenhaar have learned.

Your
Sarah Schaefer

Saving gas: Network agency wants to go beyond EU target

By

Manuel Berkel

The headwind was to be expected. Shortly after the EU Commission proposed a flat energy savings target of 15 percent in its winter plan on Wednesday, individual states also publicly voiced their rejection. The government of Portugal could not accept the proposal at all because it was unsustainable, according to João Galamba, the state secretary for the environment and energy, in a newspaper interview yesterday. “We consume gas out of absolute necessity.”

The day before, the Spanish Minister for the Ecological Transition, Teresa Ribera, had already complained: “We won’t accept a sacrifice regarding an issue that we have not even been allowed to give our opinion on.” This sentence had to be understood as a side blow against Germany in particular: “Unlike other countries, the Spanish have not lived beyond their means in terms of energy.” The newspaper “El País” spoke on Thursday of an “Iberian front” against the plans of the Brussels authority.

However, this could be mere theatrical thunder before the negotiations of the energy ministers on Tuesday in Brussels. The Commission has long since considered special cases such as the Iberian Peninsula in its draft of Wednesday.

For those member states that are poorly connected to the European gas network, the energy savings target could be reduced to a maximum of five percent, according to a paragraph that was completely lost in the heated discussion. However, the affected state might then not even indirectly be able to improve the gas supply of another EU country. But couldn’t more LNG ships be diverted from the rich capacities on the Iberian Peninsula toward the North and Baltic Seas if Spain and Portugal cut back on gas?

Hungary’s solo approach

“This can only work again when the Central and Western European LNG terminals are no longer fully booked,” as Hertie School economist and political scientist Lion Hirth said yesterday at Europe.Table’s live briefing on the EU’s winter plan. So, at the moment, other European terminals could not take Spanish deliveries at all.

However, the formula “save gas to help other states” also meets with rejection in other countries. In the relationship with Germany, a number of milestones would first have to be reached before solidarity deliveries could be made, Krzysztof Sobolewski, the secretary general of the Polish ruling party PiS, had said on television on Wednesday. One such milestone could be “the issue of war reparations”.

Hungary had already announced an export ban on natural gas last week. “If that becomes the modus operandi of European cooperation, we will have a problem of a magnitude we can’t even imagine yet,” according to Hirth.

Yesterday, Hungary drove a wedge further between itself and the rest of Europe. Foreign Minister Péter Szijjártó traveled to Moscow for talks with his counterpart Sergei Lavrov to negotiate additional gas supplies of 700 million cubic meters.

At least the German government is showing goodwill when it comes to saving energy. Yesterday, German Economic Affairs Minister Robert Habeck (Greens) announced a new package of regulations – from saving in public buildings to energy efficiency measures in industry to a heating check for residential buildings. In addition, lignite-fired power plants are to be brought out of reserve to push back gas-fired power generation. According to the storage association INES, a regulation is also being prepared to prevent individual storage facilities from being emptied. Sebastian Bleschke, head of the association, spoke of a “Lex Uniper”.

Savings of 20 percent in Germany

Habeck was unimpressed by the restart of gas flows via Nord Stream 1. On Thursday, maintenance work was completed, and the pipeline was once again running at 40 percent capacity. But the minister warned that it should by no means be assumed that deliveries would continue steadily at this rate. “Russia is increasingly proving to be an uncertainty factor in the energy system.”

Habeck said he supported the Commission’s proposal on Wednesday. No surprise: Germany, as a large industrial nation, would benefit from not having to shut down its large consumers excessively. The basic idea of the Commission’s communication is to harvest the “low hanging fruits” everywhere in the EU, said gas market expert Jens Völler of consulting firm Team Consult at the Table.Live briefing. “It’s much easier to demand 15 percent from everyone than to demand more from some that are particularly affected by supply shortages of Russian gas.”

However, the responsible authority in the Ministry of Economics would like to see a greater effort. At the press conference with Habeck, Klaus Müller, President of the Federal Network Agency, recalled Germany’s role as a transit country. One is gearing up to support some Eastern European countries with gas, Müller said. As a target for avoiding a gas shortage this winter and next, he said Germany needed to save 20 percent – quite a bit more than the European target.

This assessment is also in line with calculations by the think tank Bruegel. Until now, the network agency had described the 20-percent mark in its own scenarios merely as a “grabbed figure”. On Thursday, Müller now spoke out for more binding force. “Minister Habeck has pointed out that we have probably reached five percent structurally. That is why further measures must follow. I believe it is absolutely right and necessary to go down this path.”

EU Commission puts Orbán in hot water

In recent months, Viktor Orbán has hardly missed an opportunity to be a nuisance to the EU Commission and the other member states. In May, the Hungarian prime minister blocked the oil embargo against Russia for weeks and forced exceptions for his country by threatening to veto it (Europe.Table reported). Then at the end of June, out of the blue, he stopped the planned implementation of the OECD minimum tax in the EU.

The destructive behavior could soon be avenged. Commission President Ursula von der Leyen now seems determined to use the EU’s financial leverage against Budapest. If Budapest does not meet the demands – especially for a more decisive approach against corruption – in the next four weeks, the Commission wants to recommend to the member states to freeze part of the billion-euro transfers from the EU budget. According to the conditionality mechanism, a qualified majority in the Council is sufficient for this – and Orbán can no longer count on the goodwill of the other governments.

Without real concessions, the Orbán government is unlikely to gain access to the €7.2 billion that the country is actually entitled to from the reconstruction fund. However, the absence of EU funds would hit the already struggling economy hard.

Hungary’s status as a business location is at risk

In view of the financial woes of the government in Budapest, the Commission sees itself in a strong negotiating position: “In the interest of the country, I assume that the government in Budapest will have the greatest interest in a constructive solution,” the responsible EU Budget Commissioner Johannes Hahn told Europe.Table. The attractiveness of Hungary as a business location is at stake. “I assume that in the course of autumn, it will be possible to reach a solution with Hungary that is viable for the Commission,” he said. It is in the hands of the government in Budapest to make the breakthrough.

In its most recent Rule of Law Report, the Commission had again listed the abuses. In Hungary, it said, there is an “environment in which the risks of clientelism, favoritism, and nepotism in the high-level public administration are not addressed”. For years, there have been clear indications that Orbán has been awarding public contracts financed by EU funds to allied entrepreneurs.

The government seems to be willing to make at least some concessions in the face of growing pressure from Brussels. Justice Minister Judit Varga submitted two bills to parliament on Tuesday that are intended to ensure a more effective fight against corruption and more transparent legislation. From the Commission’s point of view, however, these steps are not enough.

Hungary is running out of partners in Europe

Eastern Europe experts expect Orbán to accommodate Brussels’ demands even further in light of Hungary’s current economic woes. “I consider the Hungarian leadership to be very pragmatic, and I can well imagine that they will still give in to avert greater damage,” says Mario Holzner, head of the Vienna Institute for International Economic Studies (wiiw). Moreover, Hungary has been running out of partners in Europe since it disagreed with Poland on its policy toward Russia.

Von der Leyen hits Orbán on a sore spot. The money from the reconstruction fund and the money from the regular EU budget accounted for up to five percent of the gross domestic product. Money from Brussels fueled much of the public as well as private investment in Hungary, Holzner says. “Suspending EU funding would be a major blow to Hungary.”

The country’s economy is already threatened by recession due to the consequences of the war in Ukraine and the energy crisis. Hungary currently has a very high budget and current account deficit of around nine percent, which is partly reflected in the country’s drastically depreciating currency, says Gunter Deuber, head of research at Eastern European bank Raiffeisenbank International (RBI). “Hungary needs EU funds more than before the current crisis.”

Orbán faces a dilemma

Unlike last fall, for example, the government cannot simply borrow the funds it needs from investors, Deuber said. In the current capital market environment with rising interest rates, this is no longer so easy. Government investment has already been cut back significantly in recent months, with knock-on effects for private investment. Without the financing possibilities from the reconstruction fund, Hungary will become much less attractive for foreign direct investment in the medium term, warns the economist.

Orbán, therefore, faces a dilemma. If he cannot come to an agreement with the EU Commission and has to forego a substantial part of the EU funds as a result, the political framework of the Orbán system will also start to shake, says Holzner, head of wiiw. However, he cannot accommodate the demands from Brussels too far – because clientelism does not tolerate real transparency and the serious prosecution of corruption offenses. But Hungary expert and book author Paul Lendvai (“Orbán’s Hungary”) doubts that financial sanctions can really put the prime minister in a bind. “Given the domestic balance of power, one can hardly speak of a serious threat to the system for the foreseeable future,” Lendvai told Europe.Table. “With the plenary power provided by the exceptional laws, Orbán can crack down harder at any time.” Till Hoppe and Hans-Peter Siebenhaar

Early election in Italy on September 25

Following the decision to dissolve the two chambers of parliament in Italy, the date for the early election has been set for September 25, 2022. This was announced during a meeting of the Council of Ministers in Rome on Thursday evening, news agencies Ansa and Adnkronos reported, citing participants. In a speech, Mario Draghi, who has resigned but is still head of government, thanked head of state Sergio Mattarella for the trust he had placed in him. “We must be very proud of the work we have done on behalf of the president of the Republic in the service of all citizens,” the 74-year-old said.

The former head of the European Central Bank called to continue with determination in the coming weeks. His government is still in office until there is a new one. Mattarella previously dissolved both houses of parliament. That, in turn, was preceded by Draghi’s resignation. It was the end of a week-long poker game over the continuation of his government, triggered by the failure of the co-ruling Five Star Movement to win his confidence in a Senate vote last Thursday. On Wednesday, three of his governing parties failed to give him their vote of confidence in the Senate.

Italy is now facing an election campaign that will last for weeks. Current polls show the far-right Fratelli d’Italia (Brothers of Italy) party in the lead. An alliance with the center-right parties Lega and Forza Italia seems possible. The decisive factor is likely to be how Italy now copes before and after the election with the implementation of important reforms as a condition for the disbursement of billions in EU aid funds. dpa

House of Lords calls for energy partnership with the EU

The British government should “urgently” conclude a binding agreement with the EU on closer cooperation on emergency energy supplies, the House of Lords Economic Affairs Committee has called. The UK has LNG export capacity that could supply the EU if necessary, while the EU has gas storage facilities from which the kingdom could benefit, the House of Lords wrote in a rep o rt published Thursday.

Despite mutual assurances of cooperation on energy security, both sides planned to restrict supplies to the other in the event of a shortage. Therefore, an energy cooperation agreement should help deal with possible shortages, according to the Lords. If possible, this should also include Norway.

The UK’s gas contingency plan envisages shutting down interconnectors to the mainland in the event of a shortage that threatens the stability of the system. The EU also does not currently provide for a solidarity mechanism with the Kingdom for emergencies.

It’s something that needs to be addressed urgently, Committee Chairman Lord George Bridges told Britain’s Financial Times on Thursday. “What was considered very unlikely a few months ago now seems more likely, and so we have to have a plan.“

In addition, the House of Lords Economic Affairs Committee called on the UK government to create an energy demand reduction strategy and accelerated expansion of renewables to reduce dependence on volatile gas markets. luk

British House of Commons adopts controversial Northern Ireland bill

The British House of Commons voted in favor of the controversial Northern Ireland Protocol Bill at its third reading on Wednesday evening. The planned law is intended to allow London to unilaterally suspend the Brexit agreements on the British province. The EU had previously expressed extreme concern about the plan and threatened consequences.

Despite some fierce criticism from within their own ranks, 267 members of parliament in London voted in favor of the project, while 195 parliamentarians voted against it. Before the law can come into force, however, it still has to pass through the second chamber of Parliament, the House of Lords. This is expected to happen after the summer recess. In the House of Lords, the bill is likely to meet clearer opposition. If the government succeeds with its plans, however, there will probably be serious upheavals with Brussels. In the worst case, a trade war could break out.

With the proposed legislation, the government in London wants to force Brussels to reopen the special status agreement for Northern Ireland, which was only concluded in 2019 as part of the Brexit treaty. The EU Commission strictly rules this out and instead wants to negotiate solutions within the framework of the existing agreement.

The Northern Ireland Protocol provides for the province to remain part of the EU single market and the European Customs Union. This was intended to prevent controls on goods at the border with EU member Ireland to prevent a resurgence of conflict between supporters and opponents of unification of the two parts of Ireland. What is needed now, however, are controls between Northern Ireland and the rest of the United Kingdom. The government in London wants to lift this consequence retrospectively, but without presenting an alternative solution. dpa

Scottish independence: referendum hearings planned for October

In October, the UK’s highest court is set to consider whether Scotland should be allowed to vote again on its independence from Britain even without a green light from London. The hearings should take place on October 11 and 12 in London, the British Supreme Court said on Thursday.

The Scottish head of government, Nicola Sturgeon, who wants to lead her part of the country back into the European Union as an independent state after Brexit, had herself appealed to the court to clarify the legality of a referendum without approval from Westminster. The reason is that the British government firmly refuses to let the Scots vote again. Both sides are to present their arguments to the court in the coming weeks.

In a first referendum in 2014, a majority of Scots (55 percent) voted to remain in the United Kingdom. However, that was before Brexit, which the northernmost part of the country rejected by a clear majority (62 percent). Independence supporters, therefore, hope that the situation will change in a new vote.

Sturgeon has announced the vote – subject to the court’s decision – for October 19, 2023. If the Supreme Court finds a vote unlawful, she intends to make the next British general election a de facto referendum. dpa

ECB raises interest rates sharply

A turning point for the European Central Bank: In its first interest rate hike in eleven years, the ECB is taking an unexpectedly strong step to combat ever-rising inflation. The monetary guardians around ECB President Christine Lagarde decided on Thursday to raise the key interest rate by half a percentage point to 0.50 percent. The ECB also increased the deposit rate by the same amount – to 0.00 percent. This means that banks no longer have to pay extra when they park excess money at the ECB. The interest rate hike was twice as high as the ECB had recently announced. With this step, the ECB is initiating a comprehensive turnaround in its monetary policy.

“The Governing Council concluded that a larger first step was appropriate in the course of its policy rate normalization than signaled at its previous meeting,” Lagarde said. She also held out the prospect of further interest rate steps. She said the ECB is on a normalization path to reach its medium-term inflation target of two percent.

New crisis bond purchase program

“It is good that the ECB has come around to a big interest rate move of half a percentage point today,” commented Commerzbank chief economist Joerg Krämer. “But this can only be a start.” The euro area, with its deep-seated inflation problem, needs a series of big steps, he said. DIHK chief executive Martin Wansleben, on the other hand, urged central bankers to take “well-dosed” steps. Inflation, he said, is largely imported. “Therefore, it is not only the ECB that needs to react.”

Complementing the interest rate turnaround, the monetary guardians agreed on a new crisis bond purchase program, which the ECB can use to help heavily indebted countries such as Italy during turbulence on the bond market. The new tool, called the Transmission Protection Instrument (TPI), is intended to help ensure that monetary policy can have an even impact in the euro area and that there is no divergence in the financing costs of the individual euro states.

The consistency of the Governing Council’s monetary policy is a prerequisite for the ECB to fulfill its price stability mandate, the central bank explained. According to Lagarde, any country in the euro area can in principle benefit from the program. TPI was created for specific situations and risks that could affect any country. If necessary, the Governing Council would decide whether to activate the program for a country. rtr

Survey: German companies open to Russian IT professionals

Many German companies are willing to employ IT specialists from Russia and Belarus. This was the finding of a (non-representative) trend survey by Bitkom. According to the digital association, more than 100,000 IT professionals have already left Russia and Belarus in recent months, and many more could follow. 84 percent of the German companies surveyed said they were basically open to Russian and Belarusian IT experts. However, the prerequisite was that the IT specialists had the required qualifications and had passed an official security check in advance. Only 16 percent of the companies surveyed replied that they rejected applicants from Russia or Belarus because of security concerns. 139 companies took part in the survey.

The background is that the shortage of skilled workers in the IT industry has worsened again. “The IT skills shortage does not just affect the digital economy – it affects all industries and also the state and administration, schools and science,” said Bitkom President Achim Berg. “It would be a win-win for all sides if we pull the excellent IT know-how from Russia and Belarus and manage to bring as many IT professionals as possible to Germany.” Bitkom believes that the overall economic demand for IT professionals is now back at more than 100,000. vis

A new fiscal strategy for Germany

By Lars P. Feld and Christian Lindner

Lars P. Feld, Professor of Economics at the University of Freiburg, is Director of the Walter Eucken Institute. Christian Lindner is Finance Minister of Germany.

The extraordinary shock of the ongoing COVID-19 pandemic and the impact of Russia’s war of aggression against Ukraine are reverberating throughout the German economy. Sharp increases in the prices of energy and raw materials, as well as continued and new disruptions to global supply chains, are postponing economic recovery. Consumer and producer prices are rising at their fastest rate in a half-century, while forecasts for GDP growth are being revised downward.

In addition to these shocks, Germany is facing major medium- and long-term challenges that could further dampen growth and contribute to higher inflation. For starters, productivity growth has fallen sharply since reunification in 1990 and has remained low since the 2008 global financial crisis. Higher productivity is key to longer-term economic growth, competitiveness, and price stability.

Moreover, demographic change in Germany will accelerate sharply, with the ratio of retirees to the working-age population set to rise markedly in the second half of this decade. This will put increasing pressures on social security systems and labor markets, where limited access to skilled workers, already a problem, will constrain the economy’s medium-term growth prospects.

Fragile supply chains

Future economic growth could also be markedly weaker if the necessary investments in decarbonization fail to materialize or Germany’s transition toward climate neutrality turns out to be excessively disruptive. Higher fossil-fuel costs due to carbon pricing are essential incentives for developing renewable energy sources, but these intentional relative price changes risk driving up the overall price level.

Finally, Germany’s export-oriented economy is particularly dependent on the functioning and resilience of international supply chains, which since 2020 have proven to be fragile and vulnerable to persistent disruptions. Economic growth could be slower and inflation higher if a partial reversal or reorganization of global trade means that Germany cannot rely on the benefits of the international division of labor as it did in the past

Against this backdrop, Germany requires an efficient, forward-looking, and proactive fiscal policy that boosts sustainable growth through supply-side measures without further stoking inflation, and thus counteracts current stagflation risks. At the same time, fiscal policy must take account of today’s global geostrategic challenges and strengthen the private-sector forces required for economic modernization, digitization, and carbon-neutral transformation.

These principles are reflected in the new fiscal strategy we recently presented at the Federal Ministry of Finance. The strategy rests on three pillars, and seeks to achieve a carefully calibrated balance between tackling the current crisis and preventing the build-up of further inflationary pressures.

Emergency measures for specific target groups

The first pillar is a powerful and resolute response to exceptional events like the ongoing war in Ukraine. To this end, the government has already implemented two relief packages for households and firms that are suffering from the sharp increase in energy prices, including swift one-off payments to vulnerable households. It is also protecting hard-hit companies. To avoid creating additional inflationary pressures, these shock-absorbing measures are designed to be limited, temporary, and targeted. For example, the support for companies is front-loaded to ensure that hard-hit but otherwise profitable businesses will survive the crisis

The government is able to respond in this way thanks to the fiscal buffers built up before the pandemic. Prudence in good times meant that we had sufficient financial reserves to boost the economy’s resilience in response to COVID-19 and now the war in Ukraine.

The second pillar of our fiscal strategy aims to initiate self-sustaining economic growth by unleashing the allocative and productive forces of the market. Supply-side policies are therefore an integral part of our efforts to mitigate stagflation risks

The strategy envisages the fiscal mobilization of private-sector investment without squeezing the economy further into inflationary bottlenecks. This entails providing attractive incentives for companies and high-skilled individuals as well as improving financing opportunities for promising risk-taking enterprises.

Role model energy transition

More generally, we must strengthen Germany’s position as a good place to do business. That will require a more innovation-friendly environment, with a competitive tax system, modernized public administration, and fast-tracked procedures. The speed with which Germany is now building liquefied natural gas terminals and accelerating the energy-sector transition shows what can be done. We urgently need to undertake similar initiatives in other sectors.

The third pillar of our strategy emphasizes fiscal resilience and thus debt sustainability. It is reflected in the government’s commitment to return as early as next year to Germany’s constitutional “debt brake” (a balanced-budget rule that limits the state’s ability to borrow). Exiting fiscal expansion and returning to a neutral stance will also contribute to the fight against inflation.

Returning to structurally balanced budgets will safeguard the sustainability of public finances, preserve investor confidence, and maintain public trust in the government. The coalition government will need all three to secure funding for its modernization projects.

At a time of heightened inflation expectations, fiscal resilience and higher productivity growth are complementary goals. Both will help to moderate inflation and boost the German economy.

In cooperation with Project Syndicate.

EUROPE.TABLE EDITORS

Till
Hoppe

Charlotte
Wirth

Falk
Steiner

Timo
Landenberger

Corinna
Visser

Lukas
Knigge

Eric
Bonse

Sarah
Schaefer

Manuel
Berkel

Lisa-Martina
Klein

Markus
Grabitz

Stephan
Israel

Claire
Stam

Dear reader,

The EU’s winter plan was the subject of our first Table.Live briefing yesterday. The basic idea is to harvest the low-hanging fruits in all EU countries, according to management consultant Jens Völler. However, if export bans on gas take hold, as they have in Hungary, “then we’ll have a problem on a scale we can’t even imagine yet,” warned Lion Hirth of the Hertie School. Manuel Berkel writes about the live briefing and the latest developments in the gas crisis.

Cooperation between the EU and the UK in the event of a gas emergency is also open to development – at least that is the view of the House of Lords Economic Affairs Committee. The argumentation: The UK has LNG export capacities that could help the EU in an emergency, while the EU has gas storage facilities the UK could benefit from. Therefore, the British government should “urgently” reach a binding agreement with the EU on emergency energy supply. Read more in the News.

For months, Hungary’s Prime Minister Viktor Orbán has been defying important decisions at the EU level. But his destructive behavior could have consequences; Commission President Ursula von der Leyen now seems determined to use the EU’s financial leverage against Hungary. The lack of funds would hit the country’s economy hard. Accordingly, the Commission sees itself as having the upper hands. The EU Budget Commissioner responsible, Johannes Hahn, expects a “constructive solution”, as Till Hoppe and Hans-Peter Siebenhaar have learned.

Your
Sarah Schaefer

Saving gas: Network agency wants to go beyond EU target

By

Manuel Berkel

The headwind was to be expected. Shortly after the EU Commission proposed a flat energy savings target of 15 percent in its winter plan on Wednesday, individual states also publicly voiced their rejection. The government of Portugal could not accept the proposal at all because it was unsustainable, according to João Galamba, the state secretary for the environment and energy, in a newspaper interview yesterday. “We consume gas out of absolute necessity.”

The day before, the Spanish Minister for the Ecological Transition, Teresa Ribera, had already complained: “We won’t accept a sacrifice regarding an issue that we have not even been allowed to give our opinion on.” This sentence had to be understood as a side blow against Germany in particular: “Unlike other countries, the Spanish have not lived beyond their means in terms of energy.” The newspaper “El País” spoke on Thursday of an “Iberian front” against the plans of the Brussels authority.

However, this could be mere theatrical thunder before the negotiations of the energy ministers on Tuesday in Brussels. The Commission has long since considered special cases such as the Iberian Peninsula in its draft of Wednesday.

For those member states that are poorly connected to the European gas network, the energy savings target could be reduced to a maximum of five percent, according to a paragraph that was completely lost in the heated discussion. However, the affected state might then not even indirectly be able to improve the gas supply of another EU country. But couldn’t more LNG ships be diverted from the rich capacities on the Iberian Peninsula toward the North and Baltic Seas if Spain and Portugal cut back on gas?

Hungary’s solo approach

“This can only work again when the Central and Western European LNG terminals are no longer fully booked,” as Hertie School economist and political scientist Lion Hirth said yesterday at Europe.Table’s live briefing on the EU’s winter plan. So, at the moment, other European terminals could not take Spanish deliveries at all.

However, the formula “save gas to help other states” also meets with rejection in other countries. In the relationship with Germany, a number of milestones would first have to be reached before solidarity deliveries could be made, Krzysztof Sobolewski, the secretary general of the Polish ruling party PiS, had said on television on Wednesday. One such milestone could be “the issue of war reparations”.

Hungary had already announced an export ban on natural gas last week. “If that becomes the modus operandi of European cooperation, we will have a problem of a magnitude we can’t even imagine yet,” according to Hirth.

Yesterday, Hungary drove a wedge further between itself and the rest of Europe. Foreign Minister Péter Szijjártó traveled to Moscow for talks with his counterpart Sergei Lavrov to negotiate additional gas supplies of 700 million cubic meters.

At least the German government is showing goodwill when it comes to saving energy. Yesterday, German Economic Affairs Minister Robert Habeck (Greens) announced a new package of regulations – from saving in public buildings to energy efficiency measures in industry to a heating check for residential buildings. In addition, lignite-fired power plants are to be brought out of reserve to push back gas-fired power generation. According to the storage association INES, a regulation is also being prepared to prevent individual storage facilities from being emptied. Sebastian Bleschke, head of the association, spoke of a “Lex Uniper”.

Savings of 20 percent in Germany

Habeck was unimpressed by the restart of gas flows via Nord Stream 1. On Thursday, maintenance work was completed, and the pipeline was once again running at 40 percent capacity. But the minister warned that it should by no means be assumed that deliveries would continue steadily at this rate. “Russia is increasingly proving to be an uncertainty factor in the energy system.”

Habeck said he supported the Commission’s proposal on Wednesday. No surprise: Germany, as a large industrial nation, would benefit from not having to shut down its large consumers excessively. The basic idea of the Commission’s communication is to harvest the “low hanging fruits” everywhere in the EU, said gas market expert Jens Völler of consulting firm Team Consult at the Table.Live briefing. “It’s much easier to demand 15 percent from everyone than to demand more from some that are particularly affected by supply shortages of Russian gas.”

However, the responsible authority in the Ministry of Economics would like to see a greater effort. At the press conference with Habeck, Klaus Müller, President of the Federal Network Agency, recalled Germany’s role as a transit country. One is gearing up to support some Eastern European countries with gas, Müller said. As a target for avoiding a gas shortage this winter and next, he said Germany needed to save 20 percent – quite a bit more than the European target.

This assessment is also in line with calculations by the think tank Bruegel. Until now, the network agency had described the 20-percent mark in its own scenarios merely as a “grabbed figure”. On Thursday, Müller now spoke out for more binding force. “Minister Habeck has pointed out that we have probably reached five percent structurally. That is why further measures must follow. I believe it is absolutely right and necessary to go down this path.”

EU Commission puts Orbán in hot water

In recent months, Viktor Orbán has hardly missed an opportunity to be a nuisance to the EU Commission and the other member states. In May, the Hungarian prime minister blocked the oil embargo against Russia for weeks and forced exceptions for his country by threatening to veto it (Europe.Table reported). Then at the end of June, out of the blue, he stopped the planned implementation of the OECD minimum tax in the EU.

The destructive behavior could soon be avenged. Commission President Ursula von der Leyen now seems determined to use the EU’s financial leverage against Budapest. If Budapest does not meet the demands – especially for a more decisive approach against corruption – in the next four weeks, the Commission wants to recommend to the member states to freeze part of the billion-euro transfers from the EU budget. According to the conditionality mechanism, a qualified majority in the Council is sufficient for this – and Orbán can no longer count on the goodwill of the other governments.

Without real concessions, the Orbán government is unlikely to gain access to the €7.2 billion that the country is actually entitled to from the reconstruction fund. However, the absence of EU funds would hit the already struggling economy hard.

Hungary’s status as a business location is at risk

In view of the financial woes of the government in Budapest, the Commission sees itself in a strong negotiating position: “In the interest of the country, I assume that the government in Budapest will have the greatest interest in a constructive solution,” the responsible EU Budget Commissioner Johannes Hahn told Europe.Table. The attractiveness of Hungary as a business location is at stake. “I assume that in the course of autumn, it will be possible to reach a solution with Hungary that is viable for the Commission,” he said. It is in the hands of the government in Budapest to make the breakthrough.

In its most recent Rule of Law Report, the Commission had again listed the abuses. In Hungary, it said, there is an “environment in which the risks of clientelism, favoritism, and nepotism in the high-level public administration are not addressed”. For years, there have been clear indications that Orbán has been awarding public contracts financed by EU funds to allied entrepreneurs.

The government seems to be willing to make at least some concessions in the face of growing pressure from Brussels. Justice Minister Judit Varga submitted two bills to parliament on Tuesday that are intended to ensure a more effective fight against corruption and more transparent legislation. From the Commission’s point of view, however, these steps are not enough.

Hungary is running out of partners in Europe

Eastern Europe experts expect Orbán to accommodate Brussels’ demands even further in light of Hungary’s current economic woes. “I consider the Hungarian leadership to be very pragmatic, and I can well imagine that they will still give in to avert greater damage,” says Mario Holzner, head of the Vienna Institute for International Economic Studies (wiiw). Moreover, Hungary has been running out of partners in Europe since it disagreed with Poland on its policy toward Russia.

Von der Leyen hits Orbán on a sore spot. The money from the reconstruction fund and the money from the regular EU budget accounted for up to five percent of the gross domestic product. Money from Brussels fueled much of the public as well as private investment in Hungary, Holzner says. “Suspending EU funding would be a major blow to Hungary.”

The country’s economy is already threatened by recession due to the consequences of the war in Ukraine and the energy crisis. Hungary currently has a very high budget and current account deficit of around nine percent, which is partly reflected in the country’s drastically depreciating currency, says Gunter Deuber, head of research at Eastern European bank Raiffeisenbank International (RBI). “Hungary needs EU funds more than before the current crisis.”

Orbán faces a dilemma

Unlike last fall, for example, the government cannot simply borrow the funds it needs from investors, Deuber said. In the current capital market environment with rising interest rates, this is no longer so easy. Government investment has already been cut back significantly in recent months, with knock-on effects for private investment. Without the financing possibilities from the reconstruction fund, Hungary will become much less attractive for foreign direct investment in the medium term, warns the economist.

Orbán, therefore, faces a dilemma. If he cannot come to an agreement with the EU Commission and has to forego a substantial part of the EU funds as a result, the political framework of the Orbán system will also start to shake, says Holzner, head of wiiw. However, he cannot accommodate the demands from Brussels too far – because clientelism does not tolerate real transparency and the serious prosecution of corruption offenses. But Hungary expert and book author Paul Lendvai (“Orbán’s Hungary”) doubts that financial sanctions can really put the prime minister in a bind. “Given the domestic balance of power, one can hardly speak of a serious threat to the system for the foreseeable future,” Lendvai told Europe.Table. “With the plenary power provided by the exceptional laws, Orbán can crack down harder at any time.” Till Hoppe and Hans-Peter Siebenhaar

Early election in Italy on September 25

Following the decision to dissolve the two chambers of parliament in Italy, the date for the early election has been set for September 25, 2022. This was announced during a meeting of the Council of Ministers in Rome on Thursday evening, news agencies Ansa and Adnkronos reported, citing participants. In a speech, Mario Draghi, who has resigned but is still head of government, thanked head of state Sergio Mattarella for the trust he had placed in him. “We must be very proud of the work we have done on behalf of the president of the Republic in the service of all citizens,” the 74-year-old said.

The former head of the European Central Bank called to continue with determination in the coming weeks. His government is still in office until there is a new one. Mattarella previously dissolved both houses of parliament. That, in turn, was preceded by Draghi’s resignation. It was the end of a week-long poker game over the continuation of his government, triggered by the failure of the co-ruling Five Star Movement to win his confidence in a Senate vote last Thursday. On Wednesday, three of his governing parties failed to give him their vote of confidence in the Senate.

Italy is now facing an election campaign that will last for weeks. Current polls show the far-right Fratelli d’Italia (Brothers of Italy) party in the lead. An alliance with the center-right parties Lega and Forza Italia seems possible. The decisive factor is likely to be how Italy now copes before and after the election with the implementation of important reforms as a condition for the disbursement of billions in EU aid funds. dpa

House of Lords calls for energy partnership with the EU

The British government should “urgently” conclude a binding agreement with the EU on closer cooperation on emergency energy supplies, the House of Lords Economic Affairs Committee has called. The UK has LNG export capacity that could supply the EU if necessary, while the EU has gas storage facilities from which the kingdom could benefit, the House of Lords wrote in a rep o rt published Thursday.

Despite mutual assurances of cooperation on energy security, both sides planned to restrict supplies to the other in the event of a shortage. Therefore, an energy cooperation agreement should help deal with possible shortages, according to the Lords. If possible, this should also include Norway.

The UK’s gas contingency plan envisages shutting down interconnectors to the mainland in the event of a shortage that threatens the stability of the system. The EU also does not currently provide for a solidarity mechanism with the Kingdom for emergencies.

It’s something that needs to be addressed urgently, Committee Chairman Lord George Bridges told Britain’s Financial Times on Thursday. “What was considered very unlikely a few months ago now seems more likely, and so we have to have a plan.“

In addition, the House of Lords Economic Affairs Committee called on the UK government to create an energy demand reduction strategy and accelerated expansion of renewables to reduce dependence on volatile gas markets. luk

British House of Commons adopts controversial Northern Ireland bill

The British House of Commons voted in favor of the controversial Northern Ireland Protocol Bill at its third reading on Wednesday evening. The planned law is intended to allow London to unilaterally suspend the Brexit agreements on the British province. The EU had previously expressed extreme concern about the plan and threatened consequences.

Despite some fierce criticism from within their own ranks, 267 members of parliament in London voted in favor of the project, while 195 parliamentarians voted against it. Before the law can come into force, however, it still has to pass through the second chamber of Parliament, the House of Lords. This is expected to happen after the summer recess. In the House of Lords, the bill is likely to meet clearer opposition. If the government succeeds with its plans, however, there will probably be serious upheavals with Brussels. In the worst case, a trade war could break out.

With the proposed legislation, the government in London wants to force Brussels to reopen the special status agreement for Northern Ireland, which was only concluded in 2019 as part of the Brexit treaty. The EU Commission strictly rules this out and instead wants to negotiate solutions within the framework of the existing agreement.

The Northern Ireland Protocol provides for the province to remain part of the EU single market and the European Customs Union. This was intended to prevent controls on goods at the border with EU member Ireland to prevent a resurgence of conflict between supporters and opponents of unification of the two parts of Ireland. What is needed now, however, are controls between Northern Ireland and the rest of the United Kingdom. The government in London wants to lift this consequence retrospectively, but without presenting an alternative solution. dpa

Scottish independence: referendum hearings planned for October

In October, the UK’s highest court is set to consider whether Scotland should be allowed to vote again on its independence from Britain even without a green light from London. The hearings should take place on October 11 and 12 in London, the British Supreme Court said on Thursday.

The Scottish head of government, Nicola Sturgeon, who wants to lead her part of the country back into the European Union as an independent state after Brexit, had herself appealed to the court to clarify the legality of a referendum without approval from Westminster. The reason is that the British government firmly refuses to let the Scots vote again. Both sides are to present their arguments to the court in the coming weeks.

In a first referendum in 2014, a majority of Scots (55 percent) voted to remain in the United Kingdom. However, that was before Brexit, which the northernmost part of the country rejected by a clear majority (62 percent). Independence supporters, therefore, hope that the situation will change in a new vote.

Sturgeon has announced the vote – subject to the court’s decision – for October 19, 2023. If the Supreme Court finds a vote unlawful, she intends to make the next British general election a de facto referendum. dpa

ECB raises interest rates sharply

A turning point for the European Central Bank: In its first interest rate hike in eleven years, the ECB is taking an unexpectedly strong step to combat ever-rising inflation. The monetary guardians around ECB President Christine Lagarde decided on Thursday to raise the key interest rate by half a percentage point to 0.50 percent. The ECB also increased the deposit rate by the same amount – to 0.00 percent. This means that banks no longer have to pay extra when they park excess money at the ECB. The interest rate hike was twice as high as the ECB had recently announced. With this step, the ECB is initiating a comprehensive turnaround in its monetary policy.

“The Governing Council concluded that a larger first step was appropriate in the course of its policy rate normalization than signaled at its previous meeting,” Lagarde said. She also held out the prospect of further interest rate steps. She said the ECB is on a normalization path to reach its medium-term inflation target of two percent.

New crisis bond purchase program

“It is good that the ECB has come around to a big interest rate move of half a percentage point today,” commented Commerzbank chief economist Joerg Krämer. “But this can only be a start.” The euro area, with its deep-seated inflation problem, needs a series of big steps, he said. DIHK chief executive Martin Wansleben, on the other hand, urged central bankers to take “well-dosed” steps. Inflation, he said, is largely imported. “Therefore, it is not only the ECB that needs to react.”

Complementing the interest rate turnaround, the monetary guardians agreed on a new crisis bond purchase program, which the ECB can use to help heavily indebted countries such as Italy during turbulence on the bond market. The new tool, called the Transmission Protection Instrument (TPI), is intended to help ensure that monetary policy can have an even impact in the euro area and that there is no divergence in the financing costs of the individual euro states.

The consistency of the Governing Council’s monetary policy is a prerequisite for the ECB to fulfill its price stability mandate, the central bank explained. According to Lagarde, any country in the euro area can in principle benefit from the program. TPI was created for specific situations and risks that could affect any country. If necessary, the Governing Council would decide whether to activate the program for a country. rtr

Survey: German companies open to Russian IT professionals

Many German companies are willing to employ IT specialists from Russia and Belarus. This was the finding of a (non-representative) trend survey by Bitkom. According to the digital association, more than 100,000 IT professionals have already left Russia and Belarus in recent months, and many more could follow. 84 percent of the German companies surveyed said they were basically open to Russian and Belarusian IT experts. However, the prerequisite was that the IT specialists had the required qualifications and had passed an official security check in advance. Only 16 percent of the companies surveyed replied that they rejected applicants from Russia or Belarus because of security concerns. 139 companies took part in the survey.

The background is that the shortage of skilled workers in the IT industry has worsened again. “The IT skills shortage does not just affect the digital economy – it affects all industries and also the state and administration, schools and science,” said Bitkom President Achim Berg. “It would be a win-win for all sides if we pull the excellent IT know-how from Russia and Belarus and manage to bring as many IT professionals as possible to Germany.” Bitkom believes that the overall economic demand for IT professionals is now back at more than 100,000. vis

A new fiscal strategy for Germany

By Lars P. Feld and Christian Lindner

The extraordinary shock of the ongoing COVID-19 pandemic and the impact of Russia’s war of aggression against Ukraine are reverberating throughout the German economy. Sharp increases in the prices of energy and raw materials, as well as continued and new disruptions to global supply chains, are postponing economic recovery. Consumer and producer prices are rising at their fastest rate in a half-century, while forecasts for GDP growth are being revised downward.

In addition to these shocks, Germany is facing major medium- and long-term challenges that could further dampen growth and contribute to higher inflation. For starters, productivity growth has fallen sharply since reunification in 1990 and has remained low since the 2008 global financial crisis. Higher productivity is key to longer-term economic growth, competitiveness, and price stability.

Moreover, demographic change in Germany will accelerate sharply, with the ratio of retirees to the working-age population set to rise markedly in the second half of this decade. This will put increasing pressures on social security systems and labor markets, where limited access to skilled workers, already a problem, will constrain the economy’s medium-term growth prospects.

Fragile supply chains

Future economic growth could also be markedly weaker if the necessary investments in decarbonization fail to materialize or Germany’s transition toward climate neutrality turns out to be excessively disruptive. Higher fossil-fuel costs due to carbon pricing are essential incentives for developing renewable energy sources, but these intentional relative price changes risk driving up the overall price level.

Finally, Germany’s export-oriented economy is particularly dependent on the functioning and resilience of international supply chains, which since 2020 have proven to be fragile and vulnerable to persistent disruptions. Economic growth could be slower and inflation higher if a partial reversal or reorganization of global trade means that Germany cannot rely on the benefits of the international division of labor as it did in the past

Against this backdrop, Germany requires an efficient, forward-looking, and proactive fiscal policy that boosts sustainable growth through supply-side measures without further stoking inflation, and thus counteracts current stagflation risks. At the same time, fiscal policy must take account of today’s global geostrategic challenges and strengthen the private-sector forces required for economic modernization, digitization, and carbon-neutral transformation.

These principles are reflected in the new fiscal strategy we recently presented at the Federal Ministry of Finance. The strategy rests on three pillars, and seeks to achieve a carefully calibrated balance between tackling the current crisis and preventing the build-up of further inflationary pressures.

Emergency measures for specific target groups

The first pillar is a powerful and resolute response to exceptional events like the ongoing war in Ukraine. To this end, the government has already implemented two relief packages for households and firms that are suffering from the sharp increase in energy prices, including swift one-off payments to vulnerable households. It is also protecting hard-hit companies. To avoid creating additional inflationary pressures, these shock-absorbing measures are designed to be limited, temporary, and targeted. For example, the support for companies is front-loaded to ensure that hard-hit but otherwise profitable businesses will survive the crisis

The government is able to respond in this way thanks to the fiscal buffers built up before the pandemic. Prudence in good times meant that we had sufficient financial reserves to boost the economy’s resilience in response to COVID-19 and now the war in Ukraine.

The second pillar of our fiscal strategy aims to initiate self-sustaining economic growth by unleashing the allocative and productive forces of the market. Supply-side policies are therefore an integral part of our efforts to mitigate stagflation risks

The strategy envisages the fiscal mobilization of private-sector investment without squeezing the economy further into inflationary bottlenecks. This entails providing attractive incentives for companies and high-skilled individuals as well as improving financing opportunities for promising risk-taking enterprises.

Role model energy transition

More generally, we must strengthen Germany’s position as a good place to do business. That will require a more innovation-friendly environment, with a competitive tax system, modernized public administration, and fast-tracked procedures. The speed with which Germany is now building liquefied natural gas terminals and accelerating the energy-sector transition shows what can be done. We urgently need to undertake similar initiatives in other sectors.

The third pillar of our strategy emphasizes fiscal resilience and thus debt sustainability. It is reflected in the government’s commitment to return as early as next year to Germany’s constitutional “debt brake” (a balanced-budget rule that limits the state’s ability to borrow). Exiting fiscal expansion and returning to a neutral stance will also contribute to the fight against inflation.

Returning to structurally balanced budgets will safeguard the sustainability of public finances, preserve investor confidence, and maintain public trust in the government. The coalition government will need all three to secure funding for its modernization projects.

At a time of heightened inflation expectations, fiscal resilience and higher productivity growth are complementary goals. Both will help to moderate inflation and boost the German economy.

In cooperation with Project Syndicate.