The Prague meeting has brought more disappointment

It was clear to everyone that last week’s informal gathering of EU leaders in Prague wouldn’t yield anything tangible to address the massive energy crisis that has tightly enveloped the continent after the Russian invasion of Ukraine. But it was not expected that, instead of finding some ad hoc and emergency solutions to address the acutely aggravating situation, the informal session will blatantly expose the deep-rooted fissures within this bloc.

The political division in the EU is an open secret, but the complete disarray displayed by the European leaders in Prague has raised a big question mark about the long-term relevance of its role to safeguard the political and economic interests of Europe. The main topic at the summit was a proposal by the majority of members for a cap on the wholesale price of gas across the bloc. The mechanics and methodology of the implementation of proposed price capping, owing to existing variations in the economic muscles and needs, are too much complicated. A group of 15 member countries has been urging the EU’s executive branch, the European Commission, to propose a cap on gas prices as soon as possible, but the idea has not secured unanimous support, with Germany notably opposing this idea.

However, despite having her own personal reservations, European Commission President Ursula von der Leyen emerged as a key proponent of an emergency formula that specifically talks about a two-phase price capping to curb the skyrocketing electricity bills in the European home and factories. Gas is perhaps the most expensive fuel needed to meet the predominant portion of the energy needs of the Europeans. The first cap, as per von der Leyen’s proposal, should be applicable to daily market transactions at the Dutch Title Transfer Facility (TTF), Europe’s leading trading hub, in a bid to quash speculative trades, and a second cap should be directly applied to the gas price that is used only for the production of electricity – a mee-too of the Iberian model being also used by Portugal and Spain to partially reduce the huge costs of gas-fired power plants. She further proposed a new benchmark for trading liquefied natural gas (LNG) and a joint procurement scheme for next winter to dissuade EU countries from outbidding each other.

As expected, for two obvious reasons, this proposal for a price cap failed to attract reasonable support at the informal summit. The first objection, and a quite natural one, to this proposal is that it would dimmish the price signals that govern the free market and force governments to negotiate over the allocation of supplies, possibly through rationing plans. It would mean a direct intervention that is totally against the essence of free market theory. Both caps are suggesting a direct intervention in the market and implicate risks for uninterrupted supplies that may result in unprecedented shortages. The second objection, put forward by Germany, Denmark and the Netherlands, is related to the upsurge in consumption that is hidden in the price cap formula. The price cap requires more reductions in consumption.

Critics have a point in shooting down this idea that lacks any incentive for the consumers to reduce gas consumption: A price cap without any guaranteed framework for a reduction in consumption will inversely encourage the consumers to use the gas without any inhibitions. As a counterproposal to this price cap, Italy, Poland, Belgium and Greece circulated their own proposal in the Prague gathering for a broader wholesale cap that would encompass all gas imports entering the EU and all gas transactions. In their view, the cap, which they call the “price corridor,” should be flexible and dynamic, working as a “circuit breaker” rather than suppressing fees at an artificially low level. This proposal for a “dynamic price corridor” is being projected as a safety valve to control volatility in the gas market by keeping the price within a prescribed range. The proposed corridor would also partly address concerns over Europe’s competitiveness in global gas markets by allowing some purchases above the price ceiling.

 

“We need market intervention because we can’t pay these prices anymore,” Belgium’s Prime Minister Alexander De Croo defended this proposal, adding that support for some sort of cap had risen from three countries in March to 24 countries now. This new proposal was able to attract many ears at the summit.

However, one of the key features of the summit was the attempt by German Chancellor Olaf Scholtz to go solo. Germany’s controversial plan to spend up to 200 billion euros ($194 billion) to help keep gas prices low for its own consumers and businesses was severely criticized by some of the participants. The Prague meeting was eclipsed by disgruntlement over Germany’s $194 billion support package. Responses ranged from irritation to verbal outbursts, showing a deep divide between Berlin and those in the EU.

Polish Prime Minister Mateusz Morawiecki was quite vocal against Germany for “destroying” the EU’s internal market by subsidizing its own businesses while opposing a pan-European cap on gas prices. “The richest country, the most powerful EU country is trying to use this crisis to gain a competitive advantage for their businesses on the single market. This is not fair. This is not how the single market should work. German selfishness must be put away in the cupboard,” is how Morawiecki expressed his resentment over the German proposal. Similar concerns also emanated from other EU leaders the existing fiscal divide separating wealthy EU countries who have deep pockets to offer lavish domestic subsidies and those who cannot.

Meanwhile, Scholz, while trying to have a face-saving retreat, tried to label the informal talks in Prague as a good attempt at clearing up “misunderstandings” about Berlin’s package, which he defended as the right thing to do, mentioning that Germany was not alone in this one-sided formula, and France, the Netherlands and others have also resorted some kind of domestic support packages.

The manipulation of energy prices by Russian President Vladimir Putin, who, apart from using his shrewd maneuvering of the energy prices in the parallel and open markets, is also playing a psychological game of nuclear threat. He has definitely created a unique dilemma for the whole continent of Europe: how to keep financially and materially supporting Ukraine to bring Russia to its knees eventually, and at the same time, how to curtail their dependency on Russian energy supplies in the near future. But the biggest challenge for the European Union is how to chalk out a unanimous strategy to tackle this tricky situation.

The Prague meeting has clearly shown that Ukraine, despite rekindling the urge for more unity and cohesion in the EU bloc, has inversely pushed the simmering divisions within this forum to the surface. The only good news, for the time being, for the EU club is that Europe’s gas storage capacity stands at about 90%, even as Russian gas supplies to the EU have been curtailed by 37% between January and August. So, they don’t have to worry much about the coming winter. But the same can’t be said about the 2023 winter. The Ukraine imbroglio is still going full steam without any sign of a halt in the near future.

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