Economy

Germany announces €200bn energy aid package

Germany has announced a €200bn aid package including a cap on gas prices in a series of measures chancellor Olaf Scholz called a “double ka-boom” to protect businesses and consumers from soaring energy costs.

“Prices must go down,” Scholz said on Thursday. “That is our firm conviction and the government will do everything it can to ensure that happens.”

He said ministers were erecting a “huge protective shield” that would help pensioners, workers and families, as well as “bakeries round the corner, tradesman or big industrial companies dependent on electricity and gas supplies that are way too expensive now” to pay their bills. German inflation hit a 70-year high of 10.9 per cent in September, according to a flash estimate published by the federal statistical agency.

Germany’s economy has been hit hard by Russia’s decision to slash gas exports after its invasion of Ukraine, which has pushed up prices to record levels and raised fears of a looming gas shortage in the eurozone’s largest economy.

A joint forecast by Germany’s leading economic institutes on Thursday predicted the country would slip into recession next year, with gross domestic product contracting by 0.4 per cent.

Scholz said Russia was using its energy exports as a “weapon” and the sabotage of the Nord Stream 1 and 2 pipelines in the Baltic Sea had shown that “gas will not be delivered from Russia for the foreseeable future”.

“There’s no other way to say it — we’re in an energy war for our prosperity and freedom,” said finance minister Christian Lindner. He added that the aim of the war was to destroy “what people have personally built up over decades — we can’t accept that, and we will fight back.”

The €200bn will be financed through new borrowing and channelled through the Economic Stabilisation Fund (WSF), a facility that was set up in 2020 to help companies, such as Lufthansa, affected by lockdowns and other public health measures imposed during the Covid-19 pandemic.

The money will be used to compensate gas importers or end consumers such as municipal utilities when they can’t pass on higher gas prices to private customers.

Robert Habeck, economy minister, said a previously planned gas levy on consumers will be scrapped. He insisted that despite the new aid measures, energy use must be reduced.

The idea of a gas price brake has long been discussed in the German government but it is controversial with some economists. Stefan Kooths of the Kiel Institute for the World Economy said the fact that so much of Germany’s gas is imported meant any reduction in its price would require “massive subsidies which would then of course pump new purchasing power into the private sector”. That would stoke inflation, he said.

“That is destabilising . . . and problematic for lower income groups,” he added. “For them it’s a downright disservice”.

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