Germany deploys ‘economic clout’ with €200bn energy aid package

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Germany has announced a €200bn “protective shield” for businesses and consumers struggling with soaring energy costs, the largest aid package adopted by a European government since the start of the energy crisis.

The centrepiece of the plan, financed by new borrowing, is an emergency cap on gas and electricity prices that have soared since Russia first slashed its gas exports to Europe over the summer.

“Prices must go down,” chancellor Olaf Scholz said on Thursday. “That is our firm conviction and the government will do everything it can to ensure that happens.” He described the package as a “double ka-boom” that would help everyone from pensioners to big industrial companies pay their energy bills.

“Germany is displaying its economic clout here in an energy war,” said Christian Lindner, finance minister.

Berlin has accused Russia of “weaponising” its energy exports since it launched its full-scale invasion of Ukraine in February. Scholz said the suspected sabotage of Nord Stream 1 and 2, the pipelines under the Baltic Sea that connect Russia directly to Europe, had shown that “gas will not be delivered from Russia for the foreseeable future”.

Disruptions in the flow of gas from Russia since the summer have pushed up prices for the fuel to record levels and raised fears of a winter gas shortage in the eurozone’s largest economy.

Companies have cut production and consumers faced with rising inflation have reined in spending. A flash estimate published by Germany’s statistical agency on Thursday showed that inflation hit a 70-year high of 10.9 per cent in September.

A joint forecast by Germany’s leading economic institutes on Thursday predicted the country would slip into recession next year, with gross domestic product contracting by 0.4 per cent.

“We’re in an energy war for our prosperity and freedom,” said Lindner, adding that he believed Russia’s aim was to destroy “what people have personally built up over decades — we can’t accept that, and we will fight back”.

The €200bn will be financed through new borrowing and channelled through the reactivated Economic Stabilisation Fund (WSF), an off-budget facility that was set up in 2020 to help companies such as Lufthansa survive the lockdowns and other public health measures imposed during the Covid-19 pandemic.

Lindner insisted that Germany would stick with its plan to reinstate the “debt brake”, a constitutional curb on new borrowing that was suspended during the pandemic, from next year, drawing a contrast between his government’s approach and that of the UK.

“We are not following the example of Great Britain by pursuing an expansive fiscal policy,” he said. The €200bn sum was only to be used to overcome the current crisis, he said.

“Even though we are setting up this protective shield, Germany is sticking to a fiscal policy based on stability and sustainability,” he said. “German sovereign bonds remain the gold standard in the world.”

Thursday’s announcement came just three weeks after Scholz’s government first unveiled plans for a brake on electricity prices, which would be funded by a new windfall levy on the profits of power companies.

A group of experts will work out the details of the gas price cap and present their recommendations in mid-October. It is expected that prices for a set volume of gas and electricity will be capped, with usage higher than that priced at market rates.

Robert Habeck, economy minister, said a previously planned gas levy on all consumers that was due to take effect on Saturday would be scrapped. The levy was designed to help companies such as Uniper, which had been plunged into crisis after being forced to buy expensive alternatives to Russian gas on the spot market. But it was rendered moot by the government’s decision to nationalise Uniper earlier this month.

Habeck insisted that despite the new aid measures, energy use must be reduced.

“We are seeing that consumption, particularly in the private sector, is not falling as much as it should,” he said. “While we’re willing to spend a lot of money to bring down prices, there is still a need to save energy.” 

The idea of a gas price brake has long been discussed in the German government but it is contentious with some economists. Stefan Kooths of the Kiel Institute for the World Economy said the fact that so much of Germany’s gas is imported meant any reduction in its price would require “massive subsidies which would then of course pump new purchasing power into the private sector”. That would stoke inflation, he said.

“That is destabilising . . . and problematic for lower income groups,” he added. “For them it’s a downright disservice”.

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