Europe agrees to intervene urgently in the energy market for fear of a recession

"You know something, although what you know you cannot explain, but you perceive it. It has been like this all your life. Something is wrong with the world. You do not know what it is. But there it is, like a splinter stuck in your mind. And it's driving you crazy. That feeling has brought you here." Morpheus told Neo in Matrixbefore choosing between the red and the blue pill. That same feeling is what the 27 EU energy ministers had when they met urgently this Friday in Brussels: they know well that something is wrong in this world.

"If you take the blue pill, end of story," said Morpheus: "You will wake up in your bed and believe what you want to believe. If you take the red one, you will stay in Wonderland. And I will show you how far rabbit hole. Remember, all I offer you is the truth."

Europe has before it the red and the blue pill. With the blue, he continues to think that the markets regulate the economy by themselves, that business profits should not be touched and that meritocracy resolves the shortcomings of needy households and companies. But with the red pill he goes into the truth: that the war in Ukraine is not over, that the energy crisis aggravated by the Russian invasion keeps inflation at peaks due to its pressure on energy supplies; that Vladimir Putin is turning off the tap; that the extreme right is coming to power in Italy; that the ECB's rate hike may suffocate the economy; that the ghost of recession appears and that the worst is yet to come. "Winter is coming," says NATO's secretary general, paraphrasing Game of Thrones, "and it's going to be very hard."

And the EU has decided, for now, to take the red pill, the truth pill.

"The recession is not inevitable," the European Commissioner, Paolo Gentiloni, repeated this Friday in Prague over and over again, together with the EU Finance Ministers. But the recession is drawn in the less optimistic forecasts of the European Central Bank for 2023: -0.9% of GDP. In what conditions? In the conditions of protracted war in Ukraine and Putin turn off the tap. That is, the conditions that are being met today.

“We have to get used to the idea that the war is going to be long”, the NATO secretary general insisted this Friday, who acknowledged: “In the coming months our unity and solidarity will be tested with the pressure on energy supplies and the increased cost of living caused by the Russian war. But the price we pay is measured in money. While the price Ukrainians pay is measured in lives. Lives lost, every day."

In Brussels, in the capitals, in NATO, everywhere they are aware that European citizens are suffering, and will suffer more and more, the consequences of the war, which can translate into social discontent and the assault on power of extreme right-wing forces, as the polls in Italy predict, just 100 after Benito Mussolini's march on Rome.

"We must act in a coordinated manner, with monetary policies [como la subida de tipos del BCE de este jueves]with fiscal policies [como las que ya defienden los nórdicos, pidiendo recortar la deuda]but if we really want to flatten the curve of inflation, we have to lower energy prices," said Gentiloni: "If we have the right energy package now, avoiding recession is a challenge but it is possible."

Among other things, why wait for the market to fix itself. Samantha Dart, energy strategist at Goldman Sachs, warns that the real effects of the energy shortage are yet to come: "It is going to be a very painful process and it will affect the European population in many different ways. A recession is already the basis assumed by our economists for Europe. It is not an easy process to go through the winter without the main fuel that keeps the lights on."

And although the analyst values ​​the efforts being made in Europe to find solutions with the construction of new energy infrastructures and more renewable energy plants, she also stresses that there will not be enough time for them to be completed on time. "There are several facilities under construction, the only problem is that they are not due to come online until at least the end of 2024. It is not going to be an overnight solution either: investments take time to lead to increased supply. Europe it will take a little longer to get out of the crisis," Dart stresses.

That is one of the keys in a Europe that was emerging from a pandemic, with 750,000 million in recovery funds to advance the green and digital transition, thinking about changing production models and growing in integration through an unprecedented community debt issue.

But on February 24, Putin invaded Ukraine, and now the debate is whether to extend these European funds until 2026, in order to weather the current situation, or whether to create another fund with joint debt to respond to the energy crisis.

And, given this situation, "the correct energy package", as Gentiloni says, happens, as agreed by the 27 EU Energy Ministers –in line with what Brussels proposed–, by limiting the benefits of energy companies and electricity to help families and businesses, while seeking a cap on the price of gas – only Russian? also to liquefied natural gas? Only those who arrive by tube?–; it is decreed to lower the consumption of light in peak hours; and public money is injected into the energy futures market – speculative in itself – “because of its volatility”, says Brussels. "The ministers invite the European Commission to design an emergency liquidity instrument that ensures that market participants have at their disposal sufficient guarantees to reach the required margins," says the summary that the rotating Czech presidency of the Council of the EU of the meeting of energy ministers this Friday in Brussels.

The situation is pressing. Both the 27 and the European Commission recognize the need to intervene urgently in the market –whether with caps on prices, profits or with public aid or with everything at the same time– in a way that seemed unthinkable a few months ago , and something that only some southern countries, such as Spain, Portugal or Italy, defended.

"What a year ago was a tremendously complicated debate, today is a premise understood by all: the market does not work. Today it has been understood why it is important to intervene", said the vice president Teresa Ribera after the meeting of the energy ministers : "To the technical neatness [del funcionamiento del mercado] the political will to protect citizens must be imposed. In that sense, I do leave satisfied because there is a reaction of closing ranks from all the governments and the European institutions wanting to show that we are willing to take the additional decisions that are necessary to reduce the impact. It was a shame to lose this year, but the important thing is that there is a consensus today."

Indeed, now the situation is different. Because Germany, which gave so many lessons in the previous financial crisis to the countries of the south, is the most vulnerable country due to the Russian energy supply – who has not done their homework now? And also because such Hanseatic and hawkish Baltic countries now find themselves, due to their proximity to Russia as well, with inflation levels of 20%. And, also, because the single European market is being hit across the board and the EU is facing the hypothesis that the yellow vests will multiply in the 27 countries due to the discontent generated by not being able to pay for heating, or gasoline, or the purchase, nor the mortgages, nor the loans while the electric companies and the banks reap great benefits.

Precisely to limit the profits of large companies, Spain, Germany, France, Italy and the Netherlands have agreed this Friday to circumvent Viktor Orbán's blackmail to apply the minimum corporate tax of 15% if Hungary maintains its blockade in the field of EU. In a joint appearance in Prague, Vice President Nadia Calviño stated: “The commitments of the G20 and the OECD must be incorporated into the European legal system. We have to move forward. Right now we need to make sure that there is no competition to the bottom and that big business contributes to the costs of the war.”

This Tuesday the European Commission will present a proposal with more details, on how to limit these benefits of companies; on how to distribute them in aids; on how to inject liquidity into the futures markets; on which gas to put caps on prices; and on how to decree the reduction of electricity consumption in homes.

From there, the governments will more or less amend the proposal, which should become a reality urgently.

At that point, it will be seen whether the EU's energy ministers are still taking the red pill or have switched to the blue one. And the fact is that there is still a pending task: the reform of the electricity market to decouple the price of gas –the most expensive energy– from the electricity bill.

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