The German government announced plans to borrow €200 billion ($195 billion) to limit natural gas prices for homes and businesses. That’s a higher price than the £150 billion ($165 billion) The UK government is expected to borrow to finance its own price cap.
Germany, Europe’s largest economy, is trying to cope with rising gas and electricity costs caused in large part by a collapse in Russian gas supplies to Europe. Moscow has blamed these supply problems on Western sanctions that followed its invasion of Ukraine in February.
“Prices have to come down, so the government will do everything possible. To this end, we are establishing a great defensive shield,” German Chancellor Olaf Scholz said in Thursday.
Under the plans, which will run until spring 2024, the government will introduce an emergency brake on gas prices, details of which will be announced next month. It’s also scrapping a planned gas tax meant to help businesses struggling with high spot market prices.
A temporary brake on the price of electricity will subsidize basic consumption for consumers and small and medium-sized businesses.
The gas sales tax will drop considerably from 19% to 7%.
The package will be financed by new loans this year, as Berlin makes use of 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, of the pro-business Free Democrats (FDP) who share power with Scholz’s Social Democrats and Greens, said on Thursday that the country’s public finances were stable.
“We can’t say it any other way: We are in an energy war,” Lindner said. “We want to clearly separate crisis spending from our regular budget management. We want to send a very clear signal to the capital markets.”
Lindner also said the steps would act as a brake on inflation, which has reached its highest level in more than a quarter century.
Consumer prices rose 10.9% in the year to September, provisional data from the country’s statistics office showed on Thursday.
Germany has historically relied on Russian natural gas exports to power its homes and heavy industry. But a sharp drop 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 causing a noticeable downturn in the German economy,” Torsten Schmidt, head of economic research at RWI – Leibniz Institute for Economic Research, said in a Thursday report co-authored with three other major German economic institutes.
While German GDP is expected to rise 1.4% this year, it is likely to fall 0.4% in 2023, the report predicts.
The report said that while scarce gas supplies should decline in the medium term, prices are likely to remain “well above pre-crisis levels”.
“This will mean a permanent loss of prosperity for Germany,” he said.
Industry groups welcomed the government’s plans.
“This is a major relief,” said Wolfgang Grosse Entrup, head of the chemical industry trade group VCI. “Now we need details quickly, as companies increasingly have their backs against the wall.”