The European Union will allow member states more flexibility to subsidise fuel and fertiliser prices to soften the impact of the price shock from the Iran war.
However, any additional aid provided will have to be granted before the end of the year, with support for fuel limited to 50% of the extra costs from the conflict, the new rules will state, according to a draft of a temporary state-aid framework seen by Bloomberg News.
“The commission has learned from past crises that swift action and targeted flexibility are key to containing the hit of geoeconomic repercussions for Europe,” the draft, which is still subject to change, says. “As in previous crises, the commission considers it necessary to respond quickly to mitigate risks for the economy.”
High energy prices were already at the top of the bloc’s political agenda before the conflict in the Middle East flared up, jolting the world’s energy supplies. Since the start of the conflict, the bloc’s bill for fossil fuel imports has increased by over €22 billion, European Commission President Ursula von der Leyen said on Monday at a press conference in Brussels.
Analysis from Bloomberg Economics shows that the war could take inflation in the euro-area to 3% this year, with a prolonged closure of the Strait of Hormuz potentially pushing that to 4%.
The proposal to grant more leeway to national governments comes as some European countries have rushed to shield citizens and industry from high prices. The commission does not comment on draft documents.
This week, Germany agreed on €1.6 billion in fuel-price relief, including the reduction of a petrol tax by 17 cents per litre over a period of two months. Meanwhile, in Ireland protesters blocked an oil refinery and demonstrated over the government’s handling of soaring fuel prices, prompting Dublin to offer relief worth hundreds of millions of euros to consumers and road-hauliers.
Still, the temporary framework seeks to allow countries to provide extra support without undermining the bloc’s climate goals, which the commission sees as crucial in averting future shocks. The draft document lays out a number of sectors deemed particularly vulnerable, including agriculture and road transport, due to the rising costs of fertilisers and diesel.
Companies that transport goods across Europe by road often have profit margins of no more than 3%, while the fuel price rise in some countries has seen a more than 7% increase in operational costs, which could disrupt supply chains, according to the draft document. The commission will present a plan to address soaring fertiliser prices in the second quarter.