Europe Isn’t Doing Nearly Enough to Fight the Cost-of-Living Crisis

European Commission president Ursula von der Leyen’s State of the Union address this week marked a small step away from austerity dogmas. But the EU isn’t facing up to the vast fallout of the mounting energy crisis.

European Commission president Ursula von der Leyen delivers a State of the Union address on September 14 in Strasbourg, France. (Philipp von Ditfurth / picture alliance via Getty Images)

Slowly, reluctantly, the European Union is being forced into new policy terrain, as the onset of a continent-wide energy crunch threatens the social fabric of the twenty-seven-nation bloc. Speaking to the EU parliament in Strasbourg, France, on Wednesday, European Commission president Ursula von der Leyen used her annual State of the Union address to present the slate of new measures designed to alleviate a deepening cost-of-living crisis, touting the “social market economy” ostensibly at the core of the European project.

Wearing the colors of the Ukrainian flag, Von der Leyen reaffirmed the bloc’s commitment to sanctions against Russia in retaliation for Moscow’s seven-month-old invasion of Ukraine. Europe is “in it for the long haul,” the top figure in the EU’s hierarchy declared, as continental leaders scramble to respond to near-double-digit inflation and the risk of an oncoming recession.

Already at historic lows, Russian gas imports to the European Union fell to a trickle after Gazprom, the Russian energy giant with close ties to the Kremlin, indefinitely suspended gas imports to Germany via the Nord Stream 1 pipeline on September 2. Russian officials have said that the reopening of the pipeline will be conditioned on the lifting of EU sanctions, while by the end of 2022, the EU’s embargo on Russian oil will come into full effect. Bracing for a winter without the usual flow of Russian hydrocarbons, European planners are hedging against the threat that inflation exhaustion will reshape the region’s politics and undermine support for sanctions.

Loosened Rules

Von der Leyen’s main proposals include the establishment of a levy on the swollen profits raked in by energy companies, modifications to rules overseeing the functioning of the European energy market, and mandatory reductions on energy consumption. The actual details of the commission’s plans will be hashed out in the weeks and months to come, as energy ministers from EU member states are scheduled to meet again on September 30.

Initially announced in the lead-up to the last meeting of the national energy ministers meeting on September 9, the European Commission is aiming to negotiate price caps on energy imports. The plan was first intended to exclusively target the remaining flows of Russian energy, but the measure is now slated to be applied to all importers, as the continent rushes to offset shortages with new supplies from North America, Algeria, and Norway.

Within the European market, energy costs have been wildly distorted by the so-called merit order system that pins electricity prices to the most expensive energy resource used by power generators. The dwindling supplies of Russian gas — 40 percent of Europe’s gas diet last year, now down to 9 percent, according to the commissioner — has therefore set the benchmark price for electrical power, dragging up the cost of all other energy sources, at least as it appears on consumers’ bills. This has been a boon to the profit margins of energy producers not reliant on hydrocarbons. Calling to “decouple the dominant influence of gas on the price of electricity,” Von der Leyen acknowledged that “the current electricity market design . . . is not doing justice to consumers anymore.”

The commission president carefully avoids the expression, but those superprofits are the object of new measures designed to skim resources off bloated corporate balance sheets. Non-carbon energy supplies, which have surfed off the inflation of electricity prices tugged up by the cost of fossil fuels, will face a revenue “cap,” while fossil fuel–dependent energy producers will be imposed a “crisis contribution.” The plan is expected to free up €140 billion to finance inflation relief.

The solutions now being proposed by the European Commission remain vague and will have to pass through negotiations among the EU’s deeply divided member states. Nonetheless, they show that the body is being forced to draw on solutions long proposed by the bloc’s left-wing forces, for whom price caps, combined negotiations with energy suppliers, and targeted taxation and redistribution of profits have long been part of the docket of solutions — not only to rising inflation but for general economic policymaking.

“The European Commission doesn’t have the option to ignore the emergency we’re in,” says Manon Aubry, president of the EU Parliament’s left-wing caucus. The European executive’s new road map is a sign that the Left is making inroads in what she called a “cultural battle” over the limits and reach of EU policy. “But we’re still nowhere near the profound transformation of EU rules that is necessary, especially when it comes to the energy market,” Aubry told Jacobin.

In yet another sign of the weakening edifice of EU economic orthodoxy, Von der Leyen called for extending the loosening of the bloc’s strict budget rules, which acted as a devastating handicap on the continent’s recovery from the 2008 financial crisis. Beyond ritual lip service, statutes on public deficits and debt-funded investments have been largely on hiatus since the onset of the pandemic in 2020. In another step toward integrated economic policy, Von der Leyen, who assumed leadership of the commission in November 2019, engineered a compromise in July 2020 to allow for a €750 billion EU recovery plan that included mutual borrowing.

“Since the beginning of the Von der Leyen era, each new crisis has been the moment when [European planners] come to the realization that market solutions are no longer working. During the COVID crisis, they realized that the European Semester economic statutes and the budgeting rules that were behind austerity were not ideal to reinforce public hospitals facing an unprecedented sanitary crisis,” said Aubry, “or that perhaps free trade rules were not ideally suited to protect production capacity in Europe.”

Europe’s energy squeeze again has the European commission backpedaling, Aubry continued: “They’re realizing that the rules of the energy market are not able to prevent people from not spending a fortune on their energy bills.”

But given the scope of the distorting effects of the inflationary crisis, the commission’s new measures are markedly limited. Though they are the prime target of the new levies, energy suppliers are not the only businesses enjoying bloated profit margins. Other industries, from distribution and logistics to financial firms, are also reaping massive profits through the current bout of inflation and are so far absent from talk of “crisis contribution” or revenue caps.

Even if the proposed levy on energy profits kicks in at a level near the expected €200 threshold per gigawatt hour of electricity — well above pre-crisis levels — that would “still leave a very significant margin for energy companies,” Aubry warned. While the resources made available by the levy would contribute to providing relief, it could just as well lock in what are, by all points of comparison, exceptionally high price levels. The “crisis contribution” aimed at the oil and gas industry may likewise be limited to a 33 percent tax on the elevated profits of the 2022 fiscal year, relative to previous annual balance sheets.

Baby Steps

Baby steps toward a new norm in EU economic policymaking, the commission’s reforms are far from the democratic control of energy infrastructure that left-wing figures say is needed to cushion individuals and households and facilitate a rapid transition to renewable energy sources. “Energy is a basic service that everyone in the European Union should have access to at an affordable price,” says Aubry.

A stopgap measure to provide immediate relief to European households and consumers, the commission’s new proposals are just as much a lifeline for an energy industry rocked by crisis and facing increasing public scrutiny, warns Martin Schirdewan, a European MP for Germany’s Die Linke.

“What they are aiming at is clearly to preserve the market-driven energy sector, meaning also defending private ownership and dividends paid out to shareholders,” Schirdewan told Jacobin. “When we talk about restructuring energy markets, it has to be about democratic control and public ownership. It has to be regionalized and based on renewable energy.”

Nonetheless, the new policy experimentation coming from the EU is a symptom of what Schirdewan called a “jump in the legitimacy of European politics,” a shift that really started to take hold during the COVID-19 crisis when “people recognized that the European Union was a key player.”

The EU’s rush to respond to the deepening inflation crisis is really a race against time. Italy is set to vote on September 25 in snap elections widely expected to hand power to the post-fascist right. Elsewhere around the continent, simmering protest movements over the rising cost of living could spur left-wing demands for ecological planning and aggressive anti-inflation measures like general price caps and redistribution. But they may just as well serve as a trampoline for far-right calls for a détente with Russia and moratoria on transitions to renewable energy.

It’s one thing that the new measures supported by Von der Leyen are an implicit acknowledgment by the European Commission that the usual policy palette is inadequate. What remains to be seen is if the bloc’s higher-ups are willing to push fast enough and far enough to find a new one. If they don’t, Europeans will not only “lose trust in the capability of their government to resolve the crisis,” said Schirdewan, “they could lose trust in democracy as such.”