Europe Must Avoid a Subsidy Race
Europe’s cross-border energy market must remain open, and the European Union should leverage its market power when purchasing gas in third countries. But without coordinated national crisis-management strategies, the region’s response to the energy crisis could quickly become self-defeating.
MUNICH – The energy crisis – especially the shortage of gas due to a loss of supplies from Russia – is plunging Europe into recession and causing social tensions and distributional conflicts. European governments are eagerly seeking ways to defuse the situation, but they will succeed only if they cooperate closely. The cross-border energy market must remain open, and the European Union should leverage its market power when purchasing gas in third countries. But without coordinated national crisis-management strategies, Europe’s response could become a self-defeating subsidy race.
Sharply rising energy prices have reduced output and consumption alike, with households responding to rising costs by cutting back on other expenses. Some are already drawing down savings, but many others do not want to touch their reserves, fearing that they will need them later. And still others, of course, have no reserves at all.
Elevated gas prices are central to this crisis, because they affect not only heating bills but also industrial and electricity production. When electricity is in high demand, renewable energies, coal, and nuclear power are not enough. And because the most expensive active power plant determines the price of electricity, higher gas prices have also driven electricity prices sharply higher – both increased approximately tenfold between January 2021 and September 2022.
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