Germany’s €200B subsidy will test EU’s Vestager

Germany’s unprecedented energy subsidy plan has one main obstacle: Margrethe Vestager.

The European Union’s competition chief will have to scrutinize Berlin’s €200 billion “large defensive umbrella,” designed to shield German consumers and businesses from soaring energy prices. While it’s unlikely that Vestager will block the plan, she’ll have to show Germany isn’t unfairly outspending other European nations – or demand changes to make sure German companies don’t get an advantage over rivals.

“This could fracture the single market,” one EU diplomat said. “We are really risking a subsidy race with some of the EU’s largest nations going against one another.”

The new German package comes on top of the substantial funding Berlin already earmarked to shield households and businesses from high energy prices and support energy firms. In the 12 months to September, Berlin allocated more than €100 billion to support families and firms dealing with soaring gas and electricity bills and an additional €85 billion to prop up energy companies, according to recent data from think tank Bruegel. 

It follows a two-year state aid spree where the European Commission has rubber-stamped swathes of handouts at record speed to prop up Europe’s economy during the pandemic. Governments were cleared to spend €3.2 trillion under the coronavirus state aid framework from 2020 to this May, a level Vestager described only last month as “proportionate and necessary.”

Germany’s financial strength has been a constant worry. But Vestager has repeatedly pointed to figures showing that concerns of a pandemic subsidy race weren’t justified and that France actually outspent Germany on pandemic aid (although state aid doesn’t catch all forms of government support such as Germany’s Kurzarbeit program to pay wages).

Subsidy race

This time, however, could be different. Germany is spending big to tackle the impact of the loss of Russian gas that its economy relies on. German officials have been arguing that the fund is necessary, given the current emergency, and proportionate, as it will cover payments for 2023 and 2024. They’re also saying it isn’t so different from what France is doing with a price cap.

As other governments look at Germany’s plans, there’s “the very real possibility of a subsidy race being launched,” said Jacques Derenne, a partner at law firm Sheppard Mullin and professor of state aid law at Liège University. “Some European governments could be lobbied by huge energy companies to develop more funding packages of their own.”

Commission officials are talking to the German government over the details of the plans. Much depends on how Germany seeks state aid approval.

“The Commission can place conditions on the distribution of funds to alleviate any distortive effects. But it all depends on which legal basis Germany notifies it,” Derenne said. “The Commission’s ability to shape the package is influenced by Berlin’s arguments on how the fund will be used.”

While the Commission could open an in-depth investigation into the package, which would allow other governments have a say, Derenne said that would be unlikely as there were no such extended probes of pandemic aid. And so far the Commission hasn’t faced pushback from the EU courts on its approval of multiple pandemic airline bailouts that also cited an economic emergency to justify heavy state support.

Sore point

A state aid row comes as European officials return to the age-old sore point of how Europe handles debt. Germany’s new willingness to take on debt to tackle the energy crisis comes after years of it lecturing other nations on frugality. Berlin’s go-it-alone approach also follows a long debate to secure the EU-wide €800 billion Recovery and Resilience Facility to aid weaker parts of Europe.

Economy Commissioner Paolo Gentiloni and Internal Market Commissioner Thierry Breton called for the EU to adopt a common approach rather than individual state action with huge, nationally distributed funds, in a Monday op-ed.

“It’s hard to imagine the Commission just waving the German plan through,” Bernd Meyring, a lawyer at Linklaters in Brussels, said.

“The package is likely to pass the review after some negotiations and potential tweaks,” he said. “They’ll find a compromise that makes both sides happy.”

Ultimately, said Bruno Liebhaberg of think tank Centre on Regulation in Europe (CERRE), “Europe cannot risk the meltdown of German industry.”