The Prague meeting brought more disappointment
It was clear to everyone that last week’s informal meeting of European leaders in Prague would bring nothing tangible to deal with the massive energy crisis that tightly enveloped the continent following the Russian invasion of Ukraine. But it was not expected that instead of finding ad hoc and emergency solutions to deal with the extremely aggravating situation, the informal session would blatantly expose the deep-rooted fissures within this bloc.
The political division within the EU is an open secret, but the utter disarray displayed by EU leaders in Prague has raised a big question mark over the long-term relevance of its role in safeguarding political and economic interests. from Europe. The main topic of the summit was a proposal by the majority of members for a cap on the wholesale price of gas across the bloc. The mechanics and methodology of implementing the proposed price cap, due to existing variations in economic muscles and needs, are too complicated. A group of 15 member countries has urged the EU’s executive arm, the European Commission, to come up with a gas price cap as soon as possible, but the idea has not won unanimous support, with Germany opting out. opposing it in particular.
However, despite her own personal reservations, European Commission President Ursula von der Leyen has emerged as a leading proponent of an emergency formula that speaks specifically to a two-phase price cap to curb skyrocketing electricity bills in European homes and factories. Gas is perhaps the most expensive fuel needed to meet the bulk of Europeans’ energy needs. The first cap, according to von der Leyen’s proposal, should apply to daily market transactions at the Dutch Title Transfer Facility (TTF), Europe’s main trading centre, with the aim of canceling speculative transactions, and a second cap should be directly applied to the price of gas which is only used for electricity production – a complement to the Iberian model also used by Portugal and Spain to partially reduce the enormous costs of power plants in the gas. She further proposed a new benchmark for liquefied natural gas (LNG) trade and a joint supply system for next winter to deter EU countries from outbidding each other.
As expected, for two obvious reasons, this price cap proposal failed to garner reasonable support at the informal summit. The first, and quite natural, objection to this proposal is that it would weaken the price signals that govern the free market and force governments to negotiate the allocation of supplies, possibly through rationing plans. This would mean direct intervention totally contrary to the very essence of free market theory. Both caps suggest direct market intervention and imply risks to uninterrupted supply that can lead to unprecedented shortages. The second objection, put forward by Germany, Denmark and the Netherlands, relates to the consumer push hidden in the price cap formula. Price caps require more reductions in consumption.
Critics are right to castigate this idea, which does not encourage consumers to reduce their gas consumption: a price cap without a guaranteed framework for a reduction in consumption will, on the contrary, encourage consumers to use gas without any inhibition. As a counter-proposal to this price cap, Italy, Poland, Belgium and Greece circulated their own proposal at the Prague rally for a broader wholesale cap that would encompass all gas imports entering the market. EU and all gas transactions. In their view, the cap, which they call the “price corridor”, should be flexible and dynamic, functioning as a “circuit breaker” rather than removing fees at an artificially low level. This “dynamic price corridor” proposal is projected as a safety valve to control volatility in the gas market by keeping the price within a prescribed range. The proposed corridor would also partly address concerns about Europe’s competitiveness in global gas markets by allowing certain purchases above the price cap.
“We need market intervention because we can no longer pay these prices,” Belgian Prime Minister Alexander De Croo defended, adding that support for some sort of cap had risen from three countries in March to 24 countries. now. This new proposal has attracted many ears at the top.
However, one of the main features of the summit was German Chancellor Olaf Scholtz’s attempt to go solo. Germany’s controversial plan to spend up to 200 billion euros ($194 billion) to help keep gas prices low for its own consumers and businesses has been harshly criticized by some of the participants. The Prague meeting was overshadowed by dissatisfaction with Germany’s $194 billion support package. Responses ranged from irritation to verbal outbursts, showing a deep divide between Berlin and those in the EU.
Polish Prime Minister Mateusz Morawiecki has been quite vocal against Germany for “destroying” the EU’s internal market by subsidizing his own companies while opposing a pan-European cap on gas prices. “The richest, most powerful country in the EU is trying to use this crisis to gain a competitive advantage for its companies in the single market. It is not fair. This is not how the single market should work. German selfishness must be put away,” was how Morawiecki expressed his resentment at the German proposal. Similar concerns have also emanated from other EU leaders about the fiscal gap between wealthy EU countries that have the deep pockets to offer lavish domestic subsidies and those that cannot.
Meanwhile Scholz, while trying to have a face-saving retreat, tried to cast the informal talks in Prague as a good attempt to clear up “misunderstandings” over the Berlin package, which he championed as the good thing to do, mentioning that Germany was not alone in this unilateral formula, and France, the Netherlands and others also resorted to some kind of domestic support programs.
The manipulation of energy prices by Russian President Vladimir Putin, who, in addition to his skillful maneuvering of energy prices in parallel and open markets, also plays a psychological game of the nuclear threat. It has definitely created a unique dilemma for the entire European continent: how to continue financially and materially supporting Ukraine to finally bring Russia to its knees, and at the same time how to reduce its dependence on Russian energy supplies in a near future. But the greatest challenge for the European Union is how to develop a unanimous strategy to deal with this delicate situation.
The Prague meeting made it clear that Ukraine, while rekindling the desire for more unity and cohesion in the EU bloc, conversely brought to the surface the divisions simmering within from this forum. The only good news, for now, for the EU club is that Europe’s gas storage capacity stands at around 90%, even as Russia’s gas supply to the EU was reduced by 37% between January and August. So they don’t have to worry much about the coming winter. But the same cannot be said for the winter of 2023. The Ukrainian imbroglio continues to run at full speed with no sign of stopping in the near future.