EU Touts Temporary Energy Subsidies, but Costs Risk Ballooning

EU Weighs Temporary Energy Subsidies as Fiscal Risks Mount

EU State Aid Measures and Fiscal Challenges Amid Energy Crisis

By Kate Abnett and Jan Strupczewski

Introduction: EU Response to Rising Energy Prices

BRUSSELS, April 23 (Reuters) - When the European Union outlines looser state aid rules next week to help governments cushion the blow from energy prices driven higher by the Iran war, it will pitch targeted measures aimed at avoiding further strain on fragile public finances.

But Reuters spoke to nine European finance officials and analysts who warned that steps such as fuel duty cuts and price caps already rolled out in many states, combined with voter pressure as right-wing populists gain ground, risk ballooning state aid and fiscal costs if the war drags on.

Mounting Fiscal Pressures in the EU

European economies have little fiscal room as they face a third economic shock in six years, after the COVID pandemic and an energy crisis triggered by Russia's invasion of Ukraine. Yet governments are under pressure to shield consumers from rising prices, with elections due next year in France, Italy, Spain, Poland, Finland, Greece and Slovakia.

"After the pandemic and the Russian gas shock, populations now expect governments to step in whenever a crisis hits," the head of the International Monetary Fund's European Department, Alfred Kammer, told Reuters.

"This crisis comes from outside and affects the entire globe, but there is still an expectation of bailouts," he said.

Protective Measures and Their Costs

According to the Jacques Delors Energy Centre, 22 out of the EU's 27 countries have already introduced protective measures costing more than 10 billion euros ($11.7 billion), ranging from VAT and excise tax cuts to delayed increases and price caps.

Those measures – including 3.5 billion euros in energy VAT cuts in Spain and a 1.6 billion euro energy tax cut in Germany – rely largely on untargeted fuel tax cuts, according to think tank Bruegel.

"Despite what many governments say, these measures are not really temporary, because they are likely to stay in place until the crisis is over, which could be a long time. Some of the COVID 'temporary' measures are still in place," one senior euro zone finance official said.

Impact of the Energy Crisis

The International Energy Agency says the conflict is the worst energy crisis the world has faced. Disruption to Middle East oil and gas supplies has added 24 billion euros to the EU's collective fossil fuel import bill in the first 50 days of the war, according to the European Commission.

Knee-Jerk Reactions vs Structural Reforms

Commission Proposals and Short-Term Relief

The Commission on Wednesday proposed changes to electricity taxation, coordinating the summer refill of gas storage and possible obligations for states to hold jet fuel stockpiles.

It is wary of costly knee-jerk reactions that provide blunt short-term relief but fail to deliver structural changes to cushion future energy price shocks.

Loosening State Aid Rules

However, it is also set next week to loosen state aid rules, retroactive to March and running until the end of 2026, allowing governments to subsidise fuel and fertiliser prices in the hardest-hit sectors, including farming, fishing and road transport.

Some analysts warn that governments will struggle to withdraw support if the war persists.

Calls for Targeted and Temporary Measures

"I understand that national circumstances and pressure will lead to decisions being made that you would not normally make," Dan Jorgensen, the EU's Energy Commissioner and a former energy minister for Denmark, told Reuters.

"We understand, and we will even help facilitate it in some instances, but we do have to insist that it is very targeted and that it is temporary," he said.

Outlook for Energy Prices and Fiscal Sustainability

The Commission expects gas prices, up about a third since the U.S. and Israel launched their war on Iran, could remain high for two years, with oil prices elevated for months even if the conflict ends soon and the Strait of Hormuz reopens.

"The fiscal bill of these emergency measures quickly adds up to very large sums," said Elisabetta Cornago, an analyst at the Centre for European Reform think tank.

Phuc-Vinh Nguyen, of the Jacques Delors Energy Centre, urged EU-wide action to reduce energy demand to ease pressure on supplies and prices.

"We have more fiscal and budgetary constraints .... It will be unsustainable for public finances in the very long term," Nguyen said.

($1 = 0.8559 euros)

Conclusion

(Reporting by Kate Abnett and Jan Strupczewski. Editing by Mark Potter)