EU urges member states to scrap energy subsidies

Brussels has called on several member states to stop subsidising companies’ and households’ energy costs, claiming the measures to curb the crisis triggered by Russia’s invasion of Ukraine soon risked breaching EU budget guidelines.

The EU suspended its rule that country’s budget deficits should not exceed 3 per cent of GDP during the pandemic, but wants to reintroduce them in 2024.

Under countries’ current plans, Germany, Portugal, Malta, France and Croatia should curtail the support unveiled in the spring of 2022 after energy prices surged following the breakdown of relations between Russia, a major source of European gas and oil, and member states.

The European Commission said in the case of the first three their measures should be removed “as soon as possible”.

Berlin is in the process of revising its plans for the coming fiscal year. A letter from the finance ministry, reported on Tuesday, called on all new spending commitments to be frozen after a ruling by its constitutional court last week challenged government plans to move €60bn set aside for the response to the pandemic into a fund to help fight climate change.

The country’s highest court ruled that the move would lead to the government breaching its constitutionally-enshrined debt brake, which limits deficits to 0.35 per cent of GDP, throwing the government’s spending plans into disarray.

Robert Habeck, economy minister and deputy chancellor, on Monday warned that the €200bn fund set up last year to protect consumers from higher energy costs could be declared unconstitutional.

“We need to adopt co-ordinated, prudent fiscal policies, starting with the winding down of energy support measures,” Paolo Gentiloni, economics commissioner, told reporters. “This is key both to enhancing public finances’ sustainability and to avoid fuelling inflationary pressures — and thus to help households recover purchasing power.”

EU member states introduced fiscal support following the surge in prices. The cost of gas on European markets hit a record high of more than €330 per megawatt hour in August 2022. However, since then it has declined to around €50 per MW hour.

The commission has been assessing eurozone countries’ 2024 budget plans as capitals prepare for the resumption of the fiscal rules.

Brussels ruled that Germany’s proposed draft budget, along with that of Italy and seven other governments, was at risk of breaching EU recommendations.

The commission said Italy had increased spending more than expected in 2023, meaning it needed to cut back its 2024 budget. Officials also said Rome should have used the 1 per cent of GDP saved from ending energy subsidies to pay down debt instead of funding green tax credits.

Currently there are nine countries whose deficits violate the deficit 3 per cent of GDP threshold, including Italy, France, Spain and Belgium. Once the data are confirmed in 2024, the commission intends to launch excessive deficit procedures at the end of June 2024, according to Gentiloni.

Along with the deficit limit, EU member states are also supposed to keep total government debt levels within a target of 60 per cent of GDP, which many member states also breach. The commission predicted Italy’s national debt would hit 141 per cent of GDP in 2025 and France’s 110 per cent.

Countries are locked in talks to overhaul the rules, which form part of the stability and growth pact. Member states, such as Italy and Greece, hope this will lead to their budget proposals being scrutinised over a four-year period, rather than annually. Germany and the Netherlands would prefer to stick with annual reviews.

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