The German government has announced plans to borrow 200 billion euros ($195 billion) to cap natural gas prices for households and businesses. It is a higher price than the £150 billion ($165 billion) the UK government would have to borrow to fund its own price cap.
Germany, Europe’s largest economy, is trying to cope with soaring gas and electricity costs caused in large part by a collapse in Russian gas supplies to Europe. Moscow blamed the supply problems on the Western sanctions that followed his invasion of ukraine in February.
“Prices have to come down, so the government will do everything it can. To this end, we are putting up a large defensive shield,” German Chancellor Olaf Scholz said on Thursday.
As part of the plans, which are expected to last until spring 2024, the government will introduce an emergency brake on petrol prices, the details of which will be announced next month. It also removes a planned gas tax to help companies struggling with high spot market prices.
A temporary curb on electricity prices will subsidize basic consumption by consumers and small and medium-sized businesses.
Gasoline sales tax will drop sharply to 7% from 19%.
The package will be financed by new borrowing this year, as Berlin uses the suspension of a constitutionally enshrined limit on new debt of 0.35% of gross domestic product.
Finance Minister Christian Lindner has said he wants to meet the limit again next year.
Lindner, a pro-business Free Democrat (FDP) who shares power with Scholz’s Social Democrats and the Greens, said on Thursday the country’s public finances were stable.
“We can’t put it any other way: we’re in an energy war,” Lindner said. “We clearly want to separate crisis spending from our ordinary budget management. We want to send a very clear signal to the capital markets.
Lindner also said the measures would act as a brake on inflation, which has risen to its highest level in more than a quarter century.
Consumer prices rose 10.9% on the year to September, preliminary data from the country’s statistics office showed on Thursday.
Germany has always relied on Russian natural gas exports to power its homes and heavy industry. But a sharp decline in gas shipments from Moscow since the start of the war has pushed some of Germany’s manufacturers to the brink.
“The Russian attack on Ukraine and the resulting crisis in the energy markets are leading to a noticeable collapse of the German economy,” said Torsten Schmidt, head of economic research at RWI – Leibniz Institute for Economics. Research, in a report co-authored Thursday with three of Germany’s other leading economic institutes.
While German GDP is expected to grow by 1.4% this year, it is expected to fall by 0.4% in 2023, the report predicts.
The report says that while gas supply is expected to ease over the medium term, prices are expected to remain “well above pre-crisis levels”.
“It will mean a permanent loss of prosperity for Germany,” he said.
Industry groups have welcomed the government’s plans.
“It’s a significant relief,” said Wolfgang Grosse Entrup, head of the chemical industry trade group VCI. “Now we need details fast, as companies are increasingly back to the wall.”