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Franco-German energy cash splash strains EU single market

Franco-German energy cash splash strains EU single market

by host

BRUSSELS — German and French moves to slash energy costs for their industries have unleashed worries from smaller European Union states that they can’t keep up, creating cracks in the bloc’s single market.

When gas flows from Russia suddenly dwindled as relations soured over Moscow’s invasion of Ukraine almost two years ago, the disruption prompted soul searching by many in the bloc who had grown used to cut-price supplies to keep their industries competitive. Now, the EU’s two largest member countries are taking things into their own hands, and are looking to artificially reduce power prices at home.

The announcements come as the bloc’s competitiveness is increasingly under the spotlight ahead of June’s EU election, against a backdrop of high energy prices, fierce global competition over green technologies, rising trade tensions with Beijing and a U.S. election that could upend ties with Washington. They also come as the bloc considers an overhaul of its coveted single market, including a potential tearing up of state subsidy rules.

Other EU nations, lacking the resources to pour public cash into their industries, warn that the French and German measures risk undermining the single market — and with it, the Continent’s competitive edge against international rivals.

“The trend of more and more massive subsidies distorting the level playing field is clearly a worrisome development, as this is the race where smaller member states do not have any chances to be successful,” said Timo Tatar, under-secretary for energy at Estonia’s Climate Ministry.

“Unilateral subsidies in some single member states will create unhealthy competition within the EU, whereas our joint efforts should be to increase the competitive position of the whole EU compared to other world economies,” he told POLITICO.

That issue will take on even more prominence as voters head to the polls across the bloc. 

“The energy price is something very foundational for any economy,” said Philipp Lausberg, an economic analyst at the European Policy Centre think tank. And with “businesses complaining about high energy prices … one of the top topics will be competitiveness because Europe is losing competitiveness,” he added.

Power imbalance

Electricity prices in Europe soared to record levels soon after Russia launched its full-scale invasion of Ukraine. Although maximum monthly EU power prices late last year sunk by around half compared to the same time in 2022, they remained more than double historical levels.

Amid strong domestic pressure, Germany announced a battery of subsidies and tax breaks for its industry in November after months of tortuous talks between the country’s three ruling coalition parties.

The package, the government said, would slash electricity taxes for manufacturers to €0.50 per megawatt hour — the minimum level allowed by the EU — and boost subsidies to 350 energy-intensive firms, unleashing €28 billion by 2028.

Within days, France had unveiled its own program. 

After difficult negotiations with state-owned utility EDF, Paris announced a new mechanism to bring the average price of electricity produced from nuclear energy to a competitive €70 per MWh from 2026, designed to last 15 years. 

Whether or not industrial consumers rely on nuclear energy — which makes up 70 percent of French electricity consumption — the move sets an implicit maximum price for future power contracts, said Phuc-Vinh Nguyen, a research fellow at the Jacques Delors Institute think tank. 

Although not technically a subsidy, the measure could also allow Paris to claw back revenues from its vast nuclear fleet when power prices spike and redistribute the cash to its industry, he said. 

Like the German scheme, “it’s [designed] to ensure that France has a competitive edge when it comes to electricity prices,” Nguyen said. 

For now, both measures are yet to get final approval in parliament. But for EU countries with less budgetary firepower than Paris and Berlin, they’re already a nightmare.

“This is something we’re not in favor of at all,” said one EU diplomat, who like others was granted anonymity to speak freely. 

The “extreme scenario,” they said, is that French and German firms benefiting from cut-price energy prices build up greater resources than their European competitors, and start buying out rivals in neighboring countries. “By all accounts it’s not really in the spirit of the European collective,” the diplomat complained. 

For others, the problem is creating an energy subsidy race that they can’t win.

“Our ministry already has companies knocking at our door saying, ‘where are our subsidies?’” said a second EU diplomat. “Eventually, you might drive off businesses from some member states,” they said, “companies will shut down [and] unemployment rises.” 

Businesses too worry they’ll be left behind. 

“They are concerned of course about how a certain amount of aid will affect their relative competitiveness,” said Stefan Sagebro, competition director at the Confederation of Swedish Enterprise industry group, adding that “some companies are … disappointed about the current government in Sweden that they haven’t brought forward very many industry positive reforms.”

The energy schemes will also make Paris and Berlin more attractive than their neighbors for foreign investment “overnight,” said Lausberg, the analyst. In the longer run, it could also encourage French and German firms using suppliers inside the EU to look for replacements domestically or further abroad where energy prices are cheaper.

“Especially those countries in Central and Eastern Europe that still depend on industry a lot, for example the Czech Republic but also Hungary” who produce parts for Germany’s auto industry, Lausberg said, “I could imagine that they will become less attractive as a result.”

Shifting priorities

Both Paris and Berlin insist they’re playing by the rules. 

“Contrary to what France could have been criticized for, if we’d had some hidden plan to implement massive subsidies for electricity — that’s not what we’re doing,” French Energy Minister Agnès Pannier-Runacher told POLITICO.

“The agreement reached with EDF aims to rely primarily on market-based mechanisms … that do not constitute state aid,” she said, adding that Paris’ cheap and abundant electricity is “a benefit for French people, and a benefit for Europe.”

“We see the concerns” of other countries, said Sven Giegold, state secretary at Germany’s economy ministry, but “everything we do is done under the auspices of state aid control by the EU Commission, and that’s very legitimate.”

The measures also come on top of an already large subsidy splurge. France and Germany make up 46 percent of total spending by EU countries allocated to easing energy prices since late 2021, according to the Bruegel think tank — even if not all that has been spent.

But for Paris and Berlin, rolling out the energy measures has taken on added importance as they aim to keep their industries alive and attract new clean tech investments amid fierce competition with China and the U.S., which unveiled its signature $369 billion mammoth climate subsidy package, Inflation Reduction Act, back in 2022.

“We see that China and the U.S. … subsidize their future investments and we may not be naive,” Giegold told POLITICO. “We cannot afford any longer that these decisions take years because if China has a new innovation cycle, we are still waiting for an EU Commission approval.”

The problem is the measures could take a toll on the single market.

“We would have preferred this type of support were regulated horizontally by EU legislation,” said one senior Commission official, referring to the reform of the bloc’s electricity market late last year.

The EU executive had wanted to set out a uniform approach for how capitals can use public cash for new green energy investments in a way that benefits all EU countries equally. But a months-long feud between France and Germany ended in a fuzzier compromise that in some cases allows for an individualized approach and new state aid controls.

For the bloc’s smaller countries, “the single market is the only tool they have,” the official added.

Ultimately, the EU’s internal market is what keeps it competitive, Lausberg said, given the bloc’s smaller economic output relative to the U.S. and China and its muted ability to regulate taxes.

The Franco-German measures are “definitely undermining the single market in the mid-to-long term,” said Lausberg, and “the single market is Europe’s biggest asset.”

“If we endanger that, then we really have a problem.”

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