The energy crisis is sowing the seeds of major internal strife within the EU. As the difficulties mount EU politics becomes less forgiving.
Disputes are also piling up. Both Hungary and the Czech Republic have objected[1]to plans for a Russian gas price cap which now appear unlikely to be implemented. The European Commission also intends to cut funding[2]for Victor Orban’s Hungarian government due to “rule-of-law concerns”. This is unlikely to increase Hungary’s incentives to remain in the union. More broadly as funding becomes conditional on countries meeting the test of adhering to “European values ” the list of such essentially political requirements is likely to grow as economic conditions deteriorate and demands for uniform policies increase.
For example Poland is tired of constant extra demands from the EU such as the demand to withdraw from the changes the Polish government was planning to the judicial system in light of the distribution of funds from the Recovery Fund to its government. The governing party’s secretary-general Krzysztof Sobolewski has warned that unless Brussels changes its ways “we will have no choice but to pull out all the cannons in our arsenal and open fire“.[3]Given that several contentious decisions still require unanimous consent such a threat may be unwise to dismiss.
Fault lines are also forming in relation to the Russia sanctions. Moderation in this regard which is ultimately required by Germany and particularly Italy is not readily accepted (and may even attract internal sanctions[4]). Russia naturally exploits existing differences to undermine the EU’s cohesion. According to reports Russia is preparing to ship the first cargo from its new liquefied natural gas plant to Greece[5]. Hungary as an outlier is purchasing additional gas from Russia under their new agreement[6]. It will be interesting to see what Germany does if the economic and population impact of energy scarcity is as severe as some reports suggest.[7]
Aside from financial concerns Italy is caught between a “rock and a hard place” in terms of gas supply. While she has been able to reduce Russian gas imports from around 40% to 15-20% further reductions are becoming increasingly difficult. There are significant bottlenecks limiting the amount of gas that can be transferred from south to north Italy. Essentially only a sufficient Russian gas supply[8]can keep the lights on in northern Italy which is also the country’s industrial hub.
In practice this means that President Vladimir Putin has the ability to plunge Italy into a deep recession creating yet another EU economic basket case. This time Germany may be unable to guarantee the financing required to save Italian companies and banks. If this is the case the eurozone may face yet another debt crisis. Will Italy’s new government simply sit back and wait for this or will it insist on the EU or itself negotiating a deal with Russia?
So how will the EU react to these dangers?
Let’s assume that the European Commission will be persuaded to propose a Recovery Fund 2.0 which will need to be significantly larger than the previous one (of around €800 billion). The fund would help countries cope with rising energy prices while also assisting Italy’s and other countries’ bond markets in maintaining market confidence. While raising rates the ECB may be forced to resume quantitative easing. Indeed this may already be happening as the ECB’s balance sheet has grown by approximately €13 billion since mid-August.
The commission is likely to try to gain more power by making essentially unconstitutional demands such as the absurd “mandatory demand cut”[9]for electricity consumption. The commission has no legal or other authority to compel such action from member states though reducing demand is a prudent policy at this time and could be the subject of a commission recommendation.
The question remains whether all member states will “play ball” in this and future issues. We are not convinced.
[1]https://www.reuters.com/business/energy/eu-price-cap-russian-gas-would-trigger-immediate-cut-off-supplies-hungary-2022-09-09/
[2]https://www.bloomberg.com/news/articles/2022-09-14/eu-to-back-funding-cuts-for-hungary-due-to-orban-graft-concerns?cmpid=socialflow-twitter-business&utm_content=business&utm_campaign=socialflow-organic&utm_medium=social&utm_source=twitter&sref=YMSdZFFo#xj4y7vzkg
[3]https://www.linkedin.com/feed/update/urn:li:activity:6970350124422070272/?commentUrn=urn%3Ali%3Acomment%3A(activity%3A6970350124422070272%2C6970411830951190529)
[4]https://www.lewrockwell.com/2022/09/no_author/eu-plans-to-threaten-hungary-with-funding-cuts-as-budapest-breaks-blocs-ranks-on-russia-policies/
[5]https://twitter.com/financialjuice/status/1568310601184854018
[6]https://www.euractiv.com/section/politics/short_news/hungary-to-buy-more-gas-from-russian-in-new-deal/
[7]https://www.spiegel.de/international/business/energy-crisis-fallout-how-bad-will-the-german-recession-be-a-9e1f479e-5fef-4e62-b5ca-2f9e87b9bbca
[8]https://www.montelnews.com/news/1347240/russian-gas-still-key-for-italys-security-of-supply
[9]https://www.bloomberg.com/news/articles/2022-09-12/eu-energy-intervention-plan-to-focus-on-profit-grab-demand-cuts?sref=YMSdZFFo#xj4y7vzkg