Europe gets powered up on billions in public spending
Paris – Almost every week, European governments are announcing emergency measures to protect households and businesses from the energy crisis stemming from Russia’s war in Ukraine.
Hundreds of billions of euros – and counting – have been shelled out so far since Russia invaded its pro-Western neighbour in late February.
Governments have gone all out, from capping gas and electricity prices to rescuing struggling energy companies and providing direct aid to households to fill up their cars.
Public spending has continued, even though European Union (EU) countries had already accumulated mountains of new debt to save their economies from the fallout of the Covid pandemic in 2020.
But some leaders have taken pride at their use of the public purse to battle this new crisis, which has sent inflation soaring, raised the cost of living and sparked fears of recession.
After announcing €14 billion (about R243 billion) in new measures last week, Italian Prime Minister Mario Draghi boasted this put Italy “among the countries which have spent the most in Europe”.
The Bruegel institute, a Brussels-based think-tank tracking energy crisis spending by EU government, ranks Italy as the second-biggest spender in Europe after Germany.
Rome has allocated €59.2 billion since September 2021 to shield households and businesses from the rising energy prices, accounting for 3.3% of its gross domestic product (GDP).
Germany tops the list with €100.2 billion, or 2.8% of GDP, as the country was hit by its heavy reliance on Russian gas supplies, which have dwindled in suspected retaliation over Western sanctions against Moscow for the war.
Germany this week announced the nationalisation of troubled gas giant Uniper.
France, which shielded consumers from gas and electricity price rises as early as November, ranks third with €53.6 billion allocated so far, representing 2.2% of GDP.
EU countries have put up €314 billion so far since September 2021, according to Bruegel.
“This number is set to increase as energy prices remain elevated,” Simone Tagliapietra, a senior fellow at Bruegel, said.
The energy bills of a typical European family could reach €500 per month next year, compared to €160 in 2021, according to US investment bank Goldman Sachs.
The measures to help consumers have ranged from a special tax on excess profits in Italy to the energy price freeze in France and subsidised public transport in Germany.
The spending follows a pandemic response that increased public debt which, in the first quarter, accounted for 189% of Greece’s GDP, 153% in Italy, 127% in Portugal, 118% in Spain and 114% in France.
“Initially designed as a temporary response to what was supposed to be a temporary problem, these measures have ballooned and become structural,” Tagliapietra said. “This is clearly not sustainable from a public finance perspective.
“It is important that governments make an effort to focus this action on the most vulnerable ... as much as possible,” he said.
The higher spending comes as borrowing costs are rising.
The European Central Bank hiked its rate for the first time in more than a decade in July to combat runaway inflation, fuelled by soaring energy prices.
The yield on 10-year French sovereign bonds reached an eightyear high of 2.5% this week, while Germany now pays 1.8% interest after boasting a negative rate at the start of the year.
The rate charged to Italy has quadrupled from one percent to four percent, reviving the spectre of the debt crisis that threatened the eurozone a decade ago.
“It is critical to avoid debt crises that could have large destabilising effects and put the EU itself at risk,” the International Monetary Fund warned in a blog calling for reforms to budget rules.
The EU has suspended until 2023 rules which limit the public deficit of countries to three percent of GDP and debt to 60%.
The European Commission plans to present proposals to reform the 27-nation bloc’s budget rules, which have been shattered by the crises. –
Measures are clearly not sustainable from a public finance perspective.
Simone Tagliapietra Bruegel Senior fellow