Home / Opinion / Views /  Mint Explainer: Germany's mega subsidies plan that risks EU unity

Germany has been Europe’s problem child this week. Europe’s largest economy unveiled a mammoth 200 billion euro energy-assistance plan for its households and businesses. Other economies, including poorer members of the Eurozone, fear that Berlin’s desire to go it alone may fracture the single market in a time of crisis. Mint explains the unfolding fracas in Europe:

What is the context?

Europe is in the midst of a major energy crisis. Economies re-opened after the COVID-19 pandemic began to fade and caused a surge in demand for energy. This was compounded by the tensions over Russia’s invasion of Ukraine. Moscow had been a key supplier of natural gas to Europe, especially Germany, and used its leverage to progressively cut off vital flows of gas to the continent. These two factors have caused uncertainty in markets and the price of energy has skyrocketed. In just a year, the benchmark European gas price has shot up by 550% with major consequences for households. For example, the United Kingdom saw bills for households rise by 54% in April with another 80% rise slated for October. As economies have been battered, leaders have called for a joint European response to the crisis.

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What is Germany’s plan?

Europe’s largest economy has suffered considerably given the energy crisis. Experts have predicted that the country may enter into a recession if the energy situation does not improve. Inflation has also hit a 70-year high in the country and has crossed into double digits.

The 200 billion euro programme is meant to act as a protective shield and will be financed through massive borrowing by the government. It will look to cap gas and electricity prices in the country in a bid to keep industries running and households heated as winter approaches. Government resources will be used to compensate gas suppliers for selling energy at reduced rates.

Why is Europe up in arms?

To begin with, other European nations fear the possibility of a 'subsidy war'. Even as industries suffer in other countries, Germany’s plan will allow its businesses a competitive advantage as they can buy energy at lower prices. Analysts and political leaders fear that other economies will have to step up similarly and bankroll highly expensive national industrial subsidy programmes to match Germany. Poorer European states find that they simply cannot match Berlin’s massive aid programme and will be outcompeted. Slovakia’s energy minister accused Berlin of “fracturing our common market".

Germany has also been accused of fracturing a common response to the energy crisis. While the Continent was able to agree on partial measures like price caps on non-gas power prices, Berlin has resisted a cap on the price of gas supplies. Its latest plans further complicate efforts to present a joint European front. Outgoing Italian Prime Minister Mario Draghi said, “We cannot divide ourselves according to the space in our national budgets."

What has been the response from Berlin?

Germany’s politicians have been defiant. Chancellor Olaf Scholz has backed the programme to the hilt and called it a “very balanced, very clever, very decisive package that serves to keep prices down". German leaders have also pointed to the energy package passed by France that has similar energy relief goals. However, the French plan seeks to spend only 12 billion euros, a fraction of its neighbour’s 200 billion euro programme. Economy Minister Robert Habeck stated that Germany was “doing the same as other countries long ago have done". The country’s politicians have not yet explained the timing of their programme which was released without consulting with other members of the European Union.

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