Yesterday, EU Commission President Ursula von der Leyen presented the proposal for the sixth sanctions package against Russia. It provides for a gradual withdrawal from Russian oil. The proposal has met with a mixed response from industry and trade associations, and experts doubt its effectiveness. Stephan Israel has the details.
What an end to Russian gas imports would mean for the European economies has been much discussed. However, the question of how to prepare for an impending gas shortage has been addressed too little, write Isabella M. Weber and Karsten Neuhoff in the Viewpoint. Their advice: negotiations on an emergency plan at EU level should begin immediately. In doing so particular attention should be paid to issues of fairness, solidarity, and legitimacy.
While Chinese companies secure public construction contracts for giant bridges EU companies in the People’s Republic are not even allowed to bid on comparable projects. The Commission no longer wants to tolerate this. With a new EU regulation, the “International Procurement Instrument” (IPI), the EU seeks to break up the procurement market in China and put low-cost bids at a disadvantage. Amelie Richter explains the plan and asks about the prospects for success.
Now it is the turn of the Permanent Representatives of the Member States. The consultations in the circle of EU ambassadors began on Wednesday. In the morning, EU Commission President Ursula von der Leyen presented the sixth sanctions package against Russia. It could take until the weekend for an agreement to be reached among the member states. The necessary unanimity is currently not guaranteed.
Hungary and Slovakia reject the proposal, although the EU Commission allows the two countries significantly longer deadlines to exit Russian oil: “This sanctions package would make Hungary’s energy supply completely impossible,” said Hungary’s Foreign Minister Peter Szijjarto in a video on his Facebook page. He added that this was not a question of a lack of political will. According to the EU Commission’s proposal, Hungary as well as Slovakia would have until the end of 2023 to find substitutes for oil from Russia. Unfortunately, that is far too little, said Slovak Energy Minister Karol Galek. Slovakia needs at least until the end of 2025 to find replacements for heavy crude oil for its refineries.
The other EU states would have to let the supply contracts for Russian crude oil expire in as little as six months and those for diesel as well as gasoline by the end of the year. The reactions of industry and important industry associations are less categorical. They seem to have already prepared themselves for the oil embargo. The industry supports the plan to phase out Russian oil imports by the end of the year, explained Adrian Willig, Managing Director of the Fuels and Energy Trade Association (en2x). Speaking at an event at the Berlin Energy Days, he stressed that the impact of an oil embargo would be harder for refineries in eastern Germany to cope with than in western Germany. Above all, he said, there is the question of possibilities for replacement supplies for Russian oil.
According to the trade association, the Leuna refinery in Saxony-Anhalt can be supplied via a pipeline through the seaport of Gdansk, albeit to a lesser extent. The refinery in Schwedt in Brandenburg, which has so far been supplied with Russian oil by the state-owned company Rosneft, could also be supplied via pipeline from Rostock on a transitional basis. However, Schwedt would also have to switch to partial load, as the supply from Rostock would not be able to compensate for the loss of Rosneft deliveries.
All in all, there would be a shortage of mineral products in the eastern German regions, the association warns. These would have to be replaced by transports within Germany and imports from abroad. The situation could be dealt with on a transitional basis, as crude oil products were available in stock. Together with the partial load of the two refineries, service station operations could be maintained. However, this would only place a considerable burden on transport routes, especially inland shipping.
The reaction of the German Chemical Industry Association (VCI) was similarly restrained: “The primacy of politics applies, and we have expected this step. Thanks to a show of strength by politicians and industry in recent weeks, supplies from alternative sources appear to be secure. However, the industry is concerned about the expected further price increases for crude oil and raw materials prices in general. The competitiveness of the industry is thus being increasingly burdened, according to VCI Managing Director Wolfgang Große Entrup. The association stresses that a supply freeze for natural gas would pose a much more serious problem.
As always with sanctions, there is a risk of detour, says Katsiaryna Kliuyeva of European Shippers Council (ESC). Russia will find other buyers for its oil, she adds. Countries less critical of Moscow, such as India or China, would be logical destinations. Vladimir Putin could also try to sell Russian oil more cheaply to poorer countries. On the condition that these countries do not participate in Western sanctions. However, when it comes to oil, the sanctions package goes beyond a mere ban on imports. Insurers, consultants and other service providers in the oil trade are also targeted. For example, it could become difficult for shipping companies to insure their tankers if they transport Russian oil.
The sanctions package is likely to undergo some changes before it is adopted by the EU ambassadors. Both the oil embargo itself and the orderly exit remain controversial. Christian Egenhofer of the Brussels-based think tank Ceps considers the oil embargo to be symbolic politics in the first place. What would really hit Putin is a gas embargo. The gas could not simply be diverted. Observers, however, do not rule out that Putin will now turn the scorn on other EU states as a reaction to the oil embargo after the gas freeze for Bulgaria and Poland. But while Hungary or Slovakia are moving too fast on oil, the Baltic states or Poland had been pushing for an immediate exit. Ursula von der Leyen, therefore, attempted the difficult balancing act: the point was to maximize the pressure on Russia and minimize the collateral damage for the EU and its partners. In the end, public pressure also plays a role. Thus, it is difficult to understand why Europe continues to indirectly co-finance Putin’s war. With Lukas Scheid and Ella Joyner
Chinese companies are grabbing public construction contracts for giant bridges in Croatia, but in the People’s Republic, EU companies are not even allowed to bid on similar projects. This is exactly what the “International Procurement Instrument” (IPI) is supposed to change. With the new EU regulation, the Commission wants to break up the Chinese procurement market. At the same time, it wants to put low-cost bids from China at a disadvantage in public tenders.
The European Parliament is expected to vote on IPI as early as June. All that is then needed is the green light from the EU Council before the new requirements are formally adopted and can come into force.
In concrete terms, the plan is as follows: if a third country such as the People’s Republic refuses to open up its public procurement market to EU suppliers to the same extent as the EU, there is a threat of sanctions. Bids from China can either be completely excluded from a procurement procedure or receive a price surcharge on top. Exclusion requires a qualified majority of EU governments. That is two-thirds of the member states. If, on the other hand, only a price surcharge is required, this is ordered from Brussels. However, this cannot be done overnight and not for every tender.
In China, there is so far “zero willingness to open the market,” said Daniel Caspary (CDU), the MEP in charge of the IPI, at a press conference following the agreement of the EU Parliament and the EU Council. He said the EU’s aim with the new instrument was not to close the European market to third countries, but rather to encourage other countries to open up. However, “We want to be defensible in case of doubt and exert pressure,” Caspary said. He emphasized that China also wants to pull know-how into its own country with cheap orders abroad.
The big question, however, is whether such penalties will really lead China to open its public tenders to Europeans. Jürgen Matthes of the Institut der deutschen Wirtschaft in Cologne is still skeptical. In principle the effects are difficult to assess.
Matthes currently sees two contradictory developments in the People’s Republic that influence the success of the IPI desired by the EU: On the one hand, there are small liberalization steps in China, for example for foreign investments and joint venture regulations or within the framework of the Regional Comprehensive Economic Partnership (RCEP) agreement. There is also some movement on International Labor Organization (ILO) conventions, at least on paper, Matthes said. “That’s one side where we’ve definitely seen positive developments here and there in recent years.”
On the other hand, China wants to become increasingly self-sufficient, for example through the “Made in China 2025” policy, according to the economist. Beijing has its eye on a number of high-tech sectors, including medical technology. “Here, there were even further restrictions on public procurement through domestic content specifications,” Matthes said.
According to these regulations on domestic value creation, preference should be given to products and manufacturers from the People’s Republic in public procurement. Provinces such as Zhejiang and Guangdong, for example, have published white lists for the import of medical products. State hospitals there are not allowed to purchase imported medical products that are not on the list. Matthes is certain that foreign companies will find it even more difficult in the future to win tenders in areas with a focus on domestic content.
The market for public procurement of medical technology is a prime example of China’s increasingly autarkic policy: “Chinese imports of medical technology goods from the EU, the USA, and Switzerland have declined over the past year. Moreover, the decline in Chinese imports of medical technology is particularly evident in medical technology procured by the central government,” researchers inside the think tank European Centre for International Political Economy (ECIPE) write in a study. For this study, public tenders in medical technology in China were examined in more detail. According to the study, Chinese companies were able to win 68 percent of the tenders in the period observed between 2019 and 2021 – and the trend is rising, ECIPE writes.
Because the IPI could create more reciprocity, Matthes is cautiously optimistic overall: “The chances of something happening in China to the advantage of European companies in public procurement are definitely greater with IPI than without it.”
According to Matthes, the new instrument is also indispensable for the EU market. This is because Chinese suppliers often enter the procurement market with dumping prices. This could be prevented if the EU actually implements the IPI – after unsuccessful negotiations with China. Moreover, the EU’s unity alone would be a signal to Beijing. Even if EU representatives emphasize that this is not a “lex China”.
Matthes says it remains to be seen how the requirements from Brussels will ultimately be reflected in public procurement. “That also depends on how the administrative experts in the municipalities put the IPI into practice in their public tenders.” In this context, a critical debate about China’s role in the European economy could lead to more sensitivity toward Chinese dumping bids. Matthes, therefore, advocates more China expertise at the regional and local level, where decisions are made.
Critics see the new procurement instrument as increasing EU protectionism. They fear that the instrument will close off EU markets to China without any positive change in the People’s Republic. The claim that the Chinese market is not open enough for EU companies is a “distortion of the facts,” said Peng Gang, the minister responsible for trade at the EU representation of China, at an online event of the EU-China Business Association (EUCBA).
Companies from the EU have a good reputation in China and are therefore very much in demand. This even goes so far that Chinese local governments “discriminate” against companies from their home country because they prefer to work with foreign suppliers, says Peng Gang. “IPI has not been implemented yet, only time will tell what the impact will be,” he says.
What would a stop on Russian gas imports mean for European economies? The question sharply divides economists. Everyone agrees that there would be negative consequences, but how bad? Predictions range from a mild recession to economic disaster and mass unemployment.
Much intellectual energy was spent on estimating the magnitude of potential GDP reductions. Much less has Yet for all the intellectual energy that has been expended estimating the magnitude of potential GDP contractions, much less has been said about how to prepare for gas shortages if Russia takes it upon itself to close the taps. It is analogous to forecasting the extent of damage a hurricane will cause, instead of actually preparing for the storm.
But now that Russia has suspended its gas supplies to Poland and Bulgaria, European politicians and commentators have no choice. They must shift their focus from quibbling over likely outcomes (which no one can accurately predict) to limiting the actual consequences of a potential gas shortage. All European gas But now that Russia has suspended gas deliveries to Poland and Bulgaria, European policymakers and pundits have no choice. They must shift the focus from caviling over probable outcomes (which no one can predict with precision) to containing the actual consequences of potential gas shortages. All of Europe’s gas providers – not just European Union producers but also neighboring countries delivering gas by pipeline and exporters of global liquefied natural gas – are already operating at full capacity. Gas delivered mostly by pipeline from Russia constitutes 40% of EU supply. Should this supply be interrupted – as it well could be – EU gas consumption would have to be reduced significantly.
In principle, three mechanisms can facilitate this reduced consumption: high prices, government programs, and mandatory rationing. In our view, the price mechanism alone will not be sufficient to manage shortages. Gas prices are already at record levels in Europe, and gas-saving is far from sufficient. Further price increases would exacerbate inflation and hit the poor the hardest. And because mandatory rationing should be a last resort, we think more attention should be paid to the third option: government initiatives.
In a recent dossier for the German Institute for Economic Research, we argue for an emergency plan at the EU level to achieve savings in gas consumption. To take the edge off the looming populist challenges from the right, any such plan must enjoy public support and be perceived as fair. Without broad inclusion of affected groups and solidarity at the EU level, privileged groups will fare much better than others, increasing existing inequalities and exacerbating tensions within and between European societies.
In a recent policy brief for the German Institute for Economic Research, we call for an EU-level contingency plan to bring about gas savings. To head off looming populist challenges from the right, any such plan must command public support and be perceived as fair. Without broad stakeholder participation and EU-level solidarity, advantaged groups will fare much better than others, aggravating existing inequalities and sharpening divisions within and between European societies.
But if an interruption lasts for several months, shutting down the European economy’s energy-intensive industrial sectors is not a viable option. It could have severe knock-on effects, including more stress on global supply chains, with potentially far-ranging implications for inflation and growth.
Gas savings on a sufficient scale would therefore need to include significant contributions from all groups of gas Gas savings on a sufficient scale to offset the shortages, therefore, would have to include significant contributions from all groups of gas users – residential consumers and services as well as industry. This would require clear targets and fair burden-sharing among EU member states, across households, and between residential and industrial users. But to be politically acceptable and ready for use, such targets must be negotiated pre-emptively.
Moreover, while there is still time, buildings with gas heating should be retrofitted with additional thermal insulation. This is a large-scale effort that will require an emergency investment plan. Additional savings can be realized from recalibrating heating systems, but some difficult behavioral responses also will be required. For example, for every 1° Celsius reduction of room temperatures, Europeans can reduce their gas usage for heating by approximately 10%, and further savings can be achieved by leaving unoccupied rooms unheated.
Asking people to save gas raises important questions of distribution and legitimacy. To win public support, governments will need to make a persuasive case for concerted action. Their plans must include fair ways of allocating the effort, support, and guidance for realizing savings, measures to ensure transparency, and – if necessary – mechanisms to enforce compliance.
The process will be easier and more effective if EU governments decide jointly on gas-saving targets, with each member state committing its fair share. Should shortages occur without a contingency plan in place, disorderly burden-sharing is likely to harm the most vulnerable disproportionately.
Given the wide range of stakeholders involved, negotiations over emergency plans should occur immediately. Gas saving targets and measures will inevitably be the backbone of any EU response to an interruption. They will be more credible if they are agreed in parallel with contingency plans for rationing and additional solidarity measures. Economic policymaking must embrace the logic of disaster preparedness, paying special attention to issues of fairness, solidarity, and legitimacy.
SA shift in focus from economic forecasting to disaster preparation could prove critical to Europe’s ability to withstand the social, economic, and political costs of an interruption in gas supplies. The task for policymakers is to develop more than price-based responses to scarcity, to ensure that everyone contributes fairly, and to contain the damage as much as possible.
In cooperation with Project Syndicate, 2022.
Yesterday, EU Commission President Ursula von der Leyen presented the proposal for the sixth sanctions package against Russia. It provides for a gradual withdrawal from Russian oil. The proposal has met with a mixed response from industry and trade associations, and experts doubt its effectiveness. Stephan Israel has the details.
What an end to Russian gas imports would mean for the European economies has been much discussed. However, the question of how to prepare for an impending gas shortage has been addressed too little, write Isabella M. Weber and Karsten Neuhoff in the Viewpoint. Their advice: negotiations on an emergency plan at EU level should begin immediately. In doing so particular attention should be paid to issues of fairness, solidarity, and legitimacy.
While Chinese companies secure public construction contracts for giant bridges EU companies in the People’s Republic are not even allowed to bid on comparable projects. The Commission no longer wants to tolerate this. With a new EU regulation, the “International Procurement Instrument” (IPI), the EU seeks to break up the procurement market in China and put low-cost bids at a disadvantage. Amelie Richter explains the plan and asks about the prospects for success.
Now it is the turn of the Permanent Representatives of the Member States. The consultations in the circle of EU ambassadors began on Wednesday. In the morning, EU Commission President Ursula von der Leyen presented the sixth sanctions package against Russia. It could take until the weekend for an agreement to be reached among the member states. The necessary unanimity is currently not guaranteed.
Hungary and Slovakia reject the proposal, although the EU Commission allows the two countries significantly longer deadlines to exit Russian oil: “This sanctions package would make Hungary’s energy supply completely impossible,” said Hungary’s Foreign Minister Peter Szijjarto in a video on his Facebook page. He added that this was not a question of a lack of political will. According to the EU Commission’s proposal, Hungary as well as Slovakia would have until the end of 2023 to find substitutes for oil from Russia. Unfortunately, that is far too little, said Slovak Energy Minister Karol Galek. Slovakia needs at least until the end of 2025 to find replacements for heavy crude oil for its refineries.
The other EU states would have to let the supply contracts for Russian crude oil expire in as little as six months and those for diesel as well as gasoline by the end of the year. The reactions of industry and important industry associations are less categorical. They seem to have already prepared themselves for the oil embargo. The industry supports the plan to phase out Russian oil imports by the end of the year, explained Adrian Willig, Managing Director of the Fuels and Energy Trade Association (en2x). Speaking at an event at the Berlin Energy Days, he stressed that the impact of an oil embargo would be harder for refineries in eastern Germany to cope with than in western Germany. Above all, he said, there is the question of possibilities for replacement supplies for Russian oil.
According to the trade association, the Leuna refinery in Saxony-Anhalt can be supplied via a pipeline through the seaport of Gdansk, albeit to a lesser extent. The refinery in Schwedt in Brandenburg, which has so far been supplied with Russian oil by the state-owned company Rosneft, could also be supplied via pipeline from Rostock on a transitional basis. However, Schwedt would also have to switch to partial load, as the supply from Rostock would not be able to compensate for the loss of Rosneft deliveries.
All in all, there would be a shortage of mineral products in the eastern German regions, the association warns. These would have to be replaced by transports within Germany and imports from abroad. The situation could be dealt with on a transitional basis, as crude oil products were available in stock. Together with the partial load of the two refineries, service station operations could be maintained. However, this would only place a considerable burden on transport routes, especially inland shipping.
The reaction of the German Chemical Industry Association (VCI) was similarly restrained: “The primacy of politics applies, and we have expected this step. Thanks to a show of strength by politicians and industry in recent weeks, supplies from alternative sources appear to be secure. However, the industry is concerned about the expected further price increases for crude oil and raw materials prices in general. The competitiveness of the industry is thus being increasingly burdened, according to VCI Managing Director Wolfgang Große Entrup. The association stresses that a supply freeze for natural gas would pose a much more serious problem.
As always with sanctions, there is a risk of detour, says Katsiaryna Kliuyeva of European Shippers Council (ESC). Russia will find other buyers for its oil, she adds. Countries less critical of Moscow, such as India or China, would be logical destinations. Vladimir Putin could also try to sell Russian oil more cheaply to poorer countries. On the condition that these countries do not participate in Western sanctions. However, when it comes to oil, the sanctions package goes beyond a mere ban on imports. Insurers, consultants and other service providers in the oil trade are also targeted. For example, it could become difficult for shipping companies to insure their tankers if they transport Russian oil.
The sanctions package is likely to undergo some changes before it is adopted by the EU ambassadors. Both the oil embargo itself and the orderly exit remain controversial. Christian Egenhofer of the Brussels-based think tank Ceps considers the oil embargo to be symbolic politics in the first place. What would really hit Putin is a gas embargo. The gas could not simply be diverted. Observers, however, do not rule out that Putin will now turn the scorn on other EU states as a reaction to the oil embargo after the gas freeze for Bulgaria and Poland. But while Hungary or Slovakia are moving too fast on oil, the Baltic states or Poland had been pushing for an immediate exit. Ursula von der Leyen, therefore, attempted the difficult balancing act: the point was to maximize the pressure on Russia and minimize the collateral damage for the EU and its partners. In the end, public pressure also plays a role. Thus, it is difficult to understand why Europe continues to indirectly co-finance Putin’s war. With Lukas Scheid and Ella Joyner
Chinese companies are grabbing public construction contracts for giant bridges in Croatia, but in the People’s Republic, EU companies are not even allowed to bid on similar projects. This is exactly what the “International Procurement Instrument” (IPI) is supposed to change. With the new EU regulation, the Commission wants to break up the Chinese procurement market. At the same time, it wants to put low-cost bids from China at a disadvantage in public tenders.
The European Parliament is expected to vote on IPI as early as June. All that is then needed is the green light from the EU Council before the new requirements are formally adopted and can come into force.
In concrete terms, the plan is as follows: if a third country such as the People’s Republic refuses to open up its public procurement market to EU suppliers to the same extent as the EU, there is a threat of sanctions. Bids from China can either be completely excluded from a procurement procedure or receive a price surcharge on top. Exclusion requires a qualified majority of EU governments. That is two-thirds of the member states. If, on the other hand, only a price surcharge is required, this is ordered from Brussels. However, this cannot be done overnight and not for every tender.
In China, there is so far “zero willingness to open the market,” said Daniel Caspary (CDU), the MEP in charge of the IPI, at a press conference following the agreement of the EU Parliament and the EU Council. He said the EU’s aim with the new instrument was not to close the European market to third countries, but rather to encourage other countries to open up. However, “We want to be defensible in case of doubt and exert pressure,” Caspary said. He emphasized that China also wants to pull know-how into its own country with cheap orders abroad.
The big question, however, is whether such penalties will really lead China to open its public tenders to Europeans. Jürgen Matthes of the Institut der deutschen Wirtschaft in Cologne is still skeptical. In principle the effects are difficult to assess.
Matthes currently sees two contradictory developments in the People’s Republic that influence the success of the IPI desired by the EU: On the one hand, there are small liberalization steps in China, for example for foreign investments and joint venture regulations or within the framework of the Regional Comprehensive Economic Partnership (RCEP) agreement. There is also some movement on International Labor Organization (ILO) conventions, at least on paper, Matthes said. “That’s one side where we’ve definitely seen positive developments here and there in recent years.”
On the other hand, China wants to become increasingly self-sufficient, for example through the “Made in China 2025” policy, according to the economist. Beijing has its eye on a number of high-tech sectors, including medical technology. “Here, there were even further restrictions on public procurement through domestic content specifications,” Matthes said.
According to these regulations on domestic value creation, preference should be given to products and manufacturers from the People’s Republic in public procurement. Provinces such as Zhejiang and Guangdong, for example, have published white lists for the import of medical products. State hospitals there are not allowed to purchase imported medical products that are not on the list. Matthes is certain that foreign companies will find it even more difficult in the future to win tenders in areas with a focus on domestic content.
The market for public procurement of medical technology is a prime example of China’s increasingly autarkic policy: “Chinese imports of medical technology goods from the EU, the USA, and Switzerland have declined over the past year. Moreover, the decline in Chinese imports of medical technology is particularly evident in medical technology procured by the central government,” researchers inside the think tank European Centre for International Political Economy (ECIPE) write in a study. For this study, public tenders in medical technology in China were examined in more detail. According to the study, Chinese companies were able to win 68 percent of the tenders in the period observed between 2019 and 2021 – and the trend is rising, ECIPE writes.
Because the IPI could create more reciprocity, Matthes is cautiously optimistic overall: “The chances of something happening in China to the advantage of European companies in public procurement are definitely greater with IPI than without it.”
According to Matthes, the new instrument is also indispensable for the EU market. This is because Chinese suppliers often enter the procurement market with dumping prices. This could be prevented if the EU actually implements the IPI – after unsuccessful negotiations with China. Moreover, the EU’s unity alone would be a signal to Beijing. Even if EU representatives emphasize that this is not a “lex China”.
Matthes says it remains to be seen how the requirements from Brussels will ultimately be reflected in public procurement. “That also depends on how the administrative experts in the municipalities put the IPI into practice in their public tenders.” In this context, a critical debate about China’s role in the European economy could lead to more sensitivity toward Chinese dumping bids. Matthes, therefore, advocates more China expertise at the regional and local level, where decisions are made.
Critics see the new procurement instrument as increasing EU protectionism. They fear that the instrument will close off EU markets to China without any positive change in the People’s Republic. The claim that the Chinese market is not open enough for EU companies is a “distortion of the facts,” said Peng Gang, the minister responsible for trade at the EU representation of China, at an online event of the EU-China Business Association (EUCBA).
Companies from the EU have a good reputation in China and are therefore very much in demand. This even goes so far that Chinese local governments “discriminate” against companies from their home country because they prefer to work with foreign suppliers, says Peng Gang. “IPI has not been implemented yet, only time will tell what the impact will be,” he says.
What would a stop on Russian gas imports mean for European economies? The question sharply divides economists. Everyone agrees that there would be negative consequences, but how bad? Predictions range from a mild recession to economic disaster and mass unemployment.
Much intellectual energy was spent on estimating the magnitude of potential GDP reductions. Much less has Yet for all the intellectual energy that has been expended estimating the magnitude of potential GDP contractions, much less has been said about how to prepare for gas shortages if Russia takes it upon itself to close the taps. It is analogous to forecasting the extent of damage a hurricane will cause, instead of actually preparing for the storm.
But now that Russia has suspended its gas supplies to Poland and Bulgaria, European politicians and commentators have no choice. They must shift their focus from quibbling over likely outcomes (which no one can accurately predict) to limiting the actual consequences of a potential gas shortage. All European gas But now that Russia has suspended gas deliveries to Poland and Bulgaria, European policymakers and pundits have no choice. They must shift the focus from caviling over probable outcomes (which no one can predict with precision) to containing the actual consequences of potential gas shortages. All of Europe’s gas providers – not just European Union producers but also neighboring countries delivering gas by pipeline and exporters of global liquefied natural gas – are already operating at full capacity. Gas delivered mostly by pipeline from Russia constitutes 40% of EU supply. Should this supply be interrupted – as it well could be – EU gas consumption would have to be reduced significantly.
In principle, three mechanisms can facilitate this reduced consumption: high prices, government programs, and mandatory rationing. In our view, the price mechanism alone will not be sufficient to manage shortages. Gas prices are already at record levels in Europe, and gas-saving is far from sufficient. Further price increases would exacerbate inflation and hit the poor the hardest. And because mandatory rationing should be a last resort, we think more attention should be paid to the third option: government initiatives.
In a recent dossier for the German Institute for Economic Research, we argue for an emergency plan at the EU level to achieve savings in gas consumption. To take the edge off the looming populist challenges from the right, any such plan must enjoy public support and be perceived as fair. Without broad inclusion of affected groups and solidarity at the EU level, privileged groups will fare much better than others, increasing existing inequalities and exacerbating tensions within and between European societies.
In a recent policy brief for the German Institute for Economic Research, we call for an EU-level contingency plan to bring about gas savings. To head off looming populist challenges from the right, any such plan must command public support and be perceived as fair. Without broad stakeholder participation and EU-level solidarity, advantaged groups will fare much better than others, aggravating existing inequalities and sharpening divisions within and between European societies.
But if an interruption lasts for several months, shutting down the European economy’s energy-intensive industrial sectors is not a viable option. It could have severe knock-on effects, including more stress on global supply chains, with potentially far-ranging implications for inflation and growth.
Gas savings on a sufficient scale would therefore need to include significant contributions from all groups of gas Gas savings on a sufficient scale to offset the shortages, therefore, would have to include significant contributions from all groups of gas users – residential consumers and services as well as industry. This would require clear targets and fair burden-sharing among EU member states, across households, and between residential and industrial users. But to be politically acceptable and ready for use, such targets must be negotiated pre-emptively.
Moreover, while there is still time, buildings with gas heating should be retrofitted with additional thermal insulation. This is a large-scale effort that will require an emergency investment plan. Additional savings can be realized from recalibrating heating systems, but some difficult behavioral responses also will be required. For example, for every 1° Celsius reduction of room temperatures, Europeans can reduce their gas usage for heating by approximately 10%, and further savings can be achieved by leaving unoccupied rooms unheated.
Asking people to save gas raises important questions of distribution and legitimacy. To win public support, governments will need to make a persuasive case for concerted action. Their plans must include fair ways of allocating the effort, support, and guidance for realizing savings, measures to ensure transparency, and – if necessary – mechanisms to enforce compliance.
The process will be easier and more effective if EU governments decide jointly on gas-saving targets, with each member state committing its fair share. Should shortages occur without a contingency plan in place, disorderly burden-sharing is likely to harm the most vulnerable disproportionately.
Given the wide range of stakeholders involved, negotiations over emergency plans should occur immediately. Gas saving targets and measures will inevitably be the backbone of any EU response to an interruption. They will be more credible if they are agreed in parallel with contingency plans for rationing and additional solidarity measures. Economic policymaking must embrace the logic of disaster preparedness, paying special attention to issues of fairness, solidarity, and legitimacy.
SA shift in focus from economic forecasting to disaster preparation could prove critical to Europe’s ability to withstand the social, economic, and political costs of an interruption in gas supplies. The task for policymakers is to develop more than price-based responses to scarcity, to ensure that everyone contributes fairly, and to contain the damage as much as possible.
In cooperation with Project Syndicate, 2022.
