European Union governments have pledged “targeted and temporary” support against high energy prices for households and firms, so as not to undermine central bank efforts to fight inflation, but officials warn it will be politically very difficult to deliver.
Speaking on the sidelines of the IMF and World Bank meetings in Washington, senior euro zone officials said political pressure to shield voters and their jobs in the face of soaring energy prices was stronger than dry macroeconomic calculations.
“If some two thirds of inflation comes from an external energy supply shock, rather than from excessive demand, will tightening fiscal policy solve it? No,” one senior euro zone official said.
“For politicians this is a very difficult situation, nobody really knows how to reconcile the monetary and fiscal policy aspect and, in the end, everybody is doing what they have to do to keep their voters shielded,” the official said.
But protecting households and firms with public money acts effectively as an economic stimulus programme, working against the European Central Bank’s efforts to tame record inflation and weakening the price signal meant to reduce demand.
To avoid fuelling inflation, euro zone finance ministers pledged to keep such help temporary and targeted, but EU Economics Commissioner Paolo Gentiloni, a former Italian prime minister, said in September it would be hard to keep to this goal.
“I know it is very difficult because when you introduce a measure the tendency to leave it there is inevitable and it is difficult to limit your support to certain groups,” he said.
The very terms of “targeted and temporary” are understood differently among euro zone finance ministers, causing a lot of tension during discussions, officials said.
“Targeted could mean targeting the poorest in the society, but it could also mean targeting the root of the problem, which means high energy prices,” a second euro zone official said, also noting that in a crisis situation it was difficult for politicians to hand out help to some but not to others.
“Temporary is also tricky — if you raise minimum wages or welfare to help the poorest, it will stay that way,” he said.
IMF’s European Department head Alfred Kammer said a good example of targeted and temporary was help for low and middle-income households through lump-sum rebates on energy bills.
But officials also note that since energy prices are not expected to fall back to levels seen before the start of the war in Ukraine anytime soon, it will be hard to decide when to withdraw those rebates.
The different levels of support that euro zone countries can afford raise additional tensions, especially after Germany announced a support scheme for households and companies of up to 200 billion euros ($194 billion) — an amount few other governments in Europe could match.
While Berlin’s plans were welcomed by voters and markets, a massive package announced in Britain that included freezing energy prices triggered a market backlash, showing not all countries have the same room for manoeuvre in the eyes of investors. Still, many officials feel governments don’t have much choice.
“In a cost-of-living crisis like this you have to protect the social fabric,” a third senior euro zone official said.
While help for households is generally accepted among euro zone governments, massive support for companies distorts competition in the EU’s single market, giving firms from richer countries an unfair competitive advantage, officials said.—Reuters
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