The German government has stated that it will borrow €200 billion ($195 billion) to put a ceiling on natural gas prices for families and businesses. That’s more than double the estimated cost of the UK government borrowing £150 billion ($165 billion) to fund its own price ceiling.
Due in major part to a decrease in Russian gas supply to Europe, Germany, Europe’s largest economy, is struggling to deal with rising gas and power costs. Moscow has placed blame for the supply shortages on the Western sanctions that followed its invasion of Ukraine in February.
As a result, the government will do everything it takes to bring prices down. In order to do this, German Chancellor Olaf Scholz declared on Thursday that his country was erecting a massive protective shield.
Plans call for an emergency price cap on gasoline to be implemented by the government, with specifics to be released next month and lasting until spring of 2024. A gas fee that was supposed to help businesses cope with rising spot market prices is also being scrapped.
Consumers and small and medium-sized businesses will receive temporary subsidies for their essential electrical needs.
The gas tax rate is dropping dramatically, from 19% to 7%.
Berlin will exploit the suspension of a constitutionally entrenched cap on new debt of 0.35% of gross domestic product to pay the package through fresh borrowing this year.
Christian Lindner, the minister of finance, has stated his intention to adhere to the quota once again in 2019.
The country’s public finances are stable, according to Free Democrat (FDP) leader and business advocate Christian Lindner on Thursday. The FDP governs in coalition with Scholz’s Social Democrats and the Greens.
“There’s no way about it; we’re in an energy war,” Lindner added. Our usual budgeting practices must be kept entirely distinct from emergency spending. We intend to send the financial markets a strong message.
Price increases at a record rate
Moreover, Lindner said that the measures will serve as a brake on inflation, which is currently at its highest level in over 25 years.
Preliminary figures released by the country’s statistics agency on Thursday revealed that consumer prices increased by 10.9% annually through September.
Natural gas supplies from Russia have long supplied Germany’s homes and heavy industry. However, since the beginning of the conflict, Moscow has drastically reduced its gas exports, putting several of Germany’s businesses on the verge of collapse.
According to a report published Thursday by RWI – Leibniz Institute of Economic Research and three other renowned German economic institutes, “the Russian aggression on Ukraine and the resulting crisis on the energy markets are contributing to a visible slowdown in the German economy.”
The research projects a 1.4% increase in German GDP this year but a 0.4% decline in GDP in 2023.
Gas prices are expected to stay “far above pre-crisis levels,” even if the analysis predicts an improvement in supply constraints over the medium term.
It warned, “This will result in Germany’s irrevocable loss of prosperity.”
Business organizations were pleased with the government’s proposals.
Wolfgang Grosse Entrup, president of the VCI trade association representing the chemical industry, called the news “significant comfort.” Companies increasingly have their backs against the wall, thus we need details now.