Brussels The top economist Jeromin Zettelmeyer calls on the EU states not only to discuss market interventions such as price controls in the fight against the energy crisis, but also to increase the energy supply. The governments “have to pull all levers at the same time,” warns Zettelmeyer in an interview with the Handelsblatt.
Specifically, he pleads for an extension of the service life of German nuclear power plants and an increase in gas production in the Netherlands. The controversial fracking must also be considered in Europe.
Zettelmeyer has made a career in the Federal Ministry of Economics, where he headed the policy department. Most recently he worked for the International Monetary Fund in Washington. Zettelmeyer has been director of the Bruegel business institute in Brussels since September.
Zettelmeyer rated the crisis management of the traffic light coalition in Berlin positively. The new relief package goes in the right direction, “because it tries to combine significant relief with incentives for further energy savings”.
The European Central Bank (ECB), on the other hand, miscalculated in the fight against inflation. “The result is catastrophic, but it’s hard to blame the ECB when the entire economists’ community has made a mistake,” argues Zettelmeyer.
Read the entire interview here:
Mr. Zettelmeyer, Russia has high foreign exchange earnings thanks to high energy prices, and the ruble is bursting with strength. Will Europe lose out in the economic war with Russia?
The sanctions are not as effective as we had imagined. High energy prices are helping Russia in the short term. The question is: was this avoidable? The mistake was in announcing the oil embargo but not implementing it right away. This sequence was certainly not a good idea, because the price has risen sharply, but demand has not fallen. How effective the embargo will be once it comes into force at the end of the year remains to be seen.
Do we need more sanctions? A price cap for Russian oil and gas, as proposed by the G7 countries and the EU Commission?
That’s a great idea in theory. We set the price cap in such a way that the Russians still have an incentive to export, but they don’t earn very much from it. By doing so, we take away both the credit for Russia and the energy price shock for the rest of the world. Unfortunately, there are several enforcement problems, above all that such a price cap can be circumvented. The crucial thing will therefore be that we first push through the oil boycott.
The economist pleads for a lifetime extension for nuclear power plants.
(Photo: Bruegel press photo)
Europe is suffering from high energy prices and there is a risk of unrest. How should European governments react to this?
You must pull all the levers at the same time. On the supply side, Germany needs to extend the life of its nuclear power plants, not just make arrangements for emergency operation. The Netherlands should increase gas production. And EU governments should buy gas together, as we did successfully with the corona vaccines. There are also good reasons for government intervention on the demand side. For example, we could lower the temperature in public buildings and switch off the lights in shops after closing time.
>> Read here: Habeck wants to keep two southern German nuclear power plants in reserve until April
What is your stance on price controls?
A price cap based on the model in Spain is not advisable because it destroys the incentive to save on gas. A subsidy that compensates households but leaves them free to decide how much they actually use would be better. Even if it is more difficult to implement: we should not subsidize consumption, but the decline in consumption.
The federal government wants to skim off “chance profits” in the energy sector.
I think taxing “accidental profits” is acceptable, provided it is clear that it is an exception linked to the current extreme situation. The same applies to short-term corporate aid intended to prevent the collapse of sustainable value chains. However, it is important to avoid a European race for energy subsidies.
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And in the medium term, the energy intensity of German industry should be reduced. This would increase their competitiveness. Energy-intensive stages of production could be outsourced to companies in friendly countries that have more reliable access to cheaper energy.
The Germans are opposed to longer terms for nuclear power plants and joint gas purchases. Is Germany doing too little for European solidarity?
I think so. We are in an exceptional situation. I don’t understand the reservations about buying gas together.
Fracking would be one way to increase your own gas production. Do we have to break this taboo?
In principle yes, because we cannot ask our neighbors to do something that we would not do ourselves. The only reason I doubt it is that there is a difference between expanding existing infrastructure to deal with a crisis and creating something completely new. Because we agree that we want to get away from gas in the longer term. So the question is: how much new infrastructure does this crisis justify? And how high is the risk that this infrastructure will then harm the fossil fuel phasing-out process?
Definition: What is a recession?
The European Central Bank meets this week and a large rate hike of up to 0.75 percentage points is expected. Does this mean that a recession in the euro zone is inevitable?
It’s not inevitable. We have two strong quarters behind us in the euro zone. The third quarter will be strong in the south because of the tourism boom. We still have very strong labor markets. It’s basically a strong economy that can take an extra hit before going into recession. The question is: How many hits will it take to get inflation down? And will the economy then slip into recession?
And the answer?
That depends on what happens in Ukraine and in the rest of the world economy – and also on how we shape our energy policies. If we work with our EU partners to increase energy supply and reduce consumption, we still have room to avoid a recession. But the risk is very high. The combination of much higher interest rates, as we expect them, and high uncertainty in the energy market in the winter is not a good one.
Did the ECB react too late?
All central banks have reacted too late, and the ECB has reacted less late than the Fed relative to the cycle. It may have been lucky because euro-zone inflation has lagged behind US inflation, and in that respect the ECB has learned from the Fed’s mistakes.
Yet we now have 9.1 percent inflation.
The result is catastrophic, but it’s hard to blame the ECB when the entire economists’ community got it wrong.
The economist pleads for an extension of the nuclear power plant terms.
(Photo: dpa)
Wait a minute: there were economists in Germany in particular who had pointed out the danger of inflation.
Yes, if you always warn about inflation, you’re right every ten years. The argument that pulls the most is that there has been an extremely large expansion in the money supply in both the euro zone and the US during the pandemic. There was probably a moment when one could say that the inflationary risks of this expansion outweigh concerns about stalling the recovery. We were all sold on the idea that the pandemic could lead to persistently low growth. It was a calculated risk to rank inflation risks lower than potential growth risks. We probably miscalculated at least the timing.
In view of the looming recession and rising interest rates, are you worried about the euro zone’s debt sustainability?
The risk is there but not acute unless there is an accident. By that I mean a situation like in Italy during the first coalition between the Five Star Movement and Salvini. That was an episode of irresponsibility in economic policy. But I don’t think it’s likely to happen again. As long as that doesn’t happen, we have the new ECB tool to contain market fluctuations in interest rates.
So all clear?
If risk premiums for southern European government bonds are in the range they are at now and governments do not act irresponsibly, markets will rely on the ECB’s instrument being used. This is a relatively strong safety net
Mr. Zettelmeyer, thank you for the interview.
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