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Mounting Deficits Force Euro Minsters To Cut Energy Support Measures

  • Euro zone finance ministers have decided to gradually withdraw energy support measures in 2023 and 2024 and use the savings to cut government deficits.
  • This move aligns with the recommendations of the European Fiscal Board, which suggested tighter fiscal policy to help the European Central Bank fight inflation and prevent interest rates from rising too high.
  • Despite the potential impact on energy prices, ministers believe determined, gradual, and realistic fiscal consolidation is necessary to strengthen sustainability and rebuild fiscal buffers, while structural reforms are deemed essential.

In a move that could send Europe into an even a deep recessionary tailspin and crush the continent's long-suffering consumers, should Europe's energy problems extend into the new year - which they almost certainly will - last Thursday Euro zone finance ministers agreed to withdraw energy support measures to their economies and use the savings to cut budget deficits and help the European Central Bank curb inflation, Reuters reported.

The ministers also agreed that "gradual, determined and realistic" fiscal consolidation is warranted to rebuild fiscal buffers after high public spending during the pandemic and the energy price crisis as they said that structural reforms were needed.

"Absent renewed energy price shocks, we will in the euro area strive to wind down energy support measures, using the related savings to reduce government deficits, as soon as possible in 2023 and 2024," the FinMin statement said.

"We will achieve the necessary overall restrictive fiscal stance in the euro area for 2024 by the implementation of the fiscal recommendations by all euro area Member States," said the statement, which was adopted by the ministers on Thursday.

The statement is in line with the recommendations of the European Fiscal Board, an independent advisory body to the European Commission, which said in late June that the euro zone should tighten fiscal policy next year by more than currently planned to help the ECB fight inflation and prevent interest rates rising too high.

While consolidation has already started, the effect of persistent inflation and higher borrowing costs will need to be addressed to reduce deficits and debt ratios over time, the draft statement said.

"A strategy of determined, gradual, and realistic fiscal consolidation is warranted to strengthen sustainability, to rebuild fiscal buffers to deliver higher sustainable growth," the statement said.

"At the same time implementing structural reforms ... remains an essential goal," it said.

Europe's generous fiscal stimulus has directly interfered with the ECB's aggressive monetary policy tightening, and - despite the loud laments of European central bankers - helped push inflation to 5.4% even though the continent is in a recession, cementing a period of brutal stagflation. Ironically, while European politicians may have finally realized they are working against the central banks, their decision to dramatically slash energy stimulus will lead to howls of outrage the moment gas and electricity prices spike again, which - with the geopolitical situation still a tinderbox - they are certain to do.

In fact, yesterday morning's attack on the Kerch bridge linking Crimea to Russia by Ukraine's Security Service, which prompted Russia to pull out of the Black Sea grain deal, has already sent wheat prices soaring...

.... guaranteeing sharply higher food prices in the immediate future.

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Leave a comment
  • Mamdouh Salameh on July 18 2023 said:
    The EU countries find themselves caught between a rock and a hard Place. They have to choose between withdrawing energy subsidies in 2023 and 2034 or trying to control the inflation and deal with the widening fiscal deficit both of which are bedevilling their economies which are projected to grow in 2023 by an anaemic 0.8% compared with 5.2%-6/5% for China.

    By withdrawing the energy subsidies, they add to the financial burdens of their citizens but by supporting economic growth, the benefit will be bigger. So their choice is clear: support the economy.

    But we have also to note that the EU is its own worst enemy. It plunged itself in the most disastrous energy crisis in its history in January 2021 as a result of trying to accelerate energy transition from fossil fuels to renewables. This was followed by the Ukraine conflict where the EU countries found themselves being forced to kowtow to the United States and offer Ukraine hundreds of billions of dollars in weaponry and financial aid in a war sparked by the United States against Russia and in which they have no vital interests. Any wonder then why the EU economy is suffering so badly?

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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