Germany Plans to Borrow €200 Billion to Tackle Gas-Price Surge

(Bloomberg)

Germany is preparing to borrow as much as €200 billion ($194 billion) to finance a plan to limit the impact of soaring energy costs on Europe’s biggest economy, a move that risks keeping consumption high as shortages loom this winter.

Chancellor Olaf Scholz’s administration will redeploy a fund created to help offset the impact of the coronavirus pandemic and bolster it with additional funds to put a lid on gas prices. The government is also working on measures to rein in electricity costs.“Prices must go down,” Scholz said at a press conference in Berlin. “To reach this goal, we are opening a big umbrella.”

Germany is especially vulnerable to the surge in energy costs triggered by the war in Ukraine due to a heavy reliance on imports of Russian gas. Higher prices are prompting companies to rein in production and sapping consumer spending power, but containing prices could keep demand high.

The country’s network regulator earlier warned that households and companies used too much gas over the past week as temperatures dropped and said savings of at least 20% are needed to avert a shortage of the fuel this winter.

Due to the energy crisis, the economy will likely contract by 0.4% next year, four of the nation’s leading research institutes said earlier Thursday, slashing an April prediction of a 3.1% expansion.

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The government will use its so-called Economic Stabilisation Fund, which is not part of the regular federal budget, to offset soaring costs after Russia slashed supplies in retaliation over sanctions stemming from its invasion of Ukraine. An expert group will now work out the details of the price cap, Scholz said.

The move is a political compromise after a controversial gas levy on consumers failed over concerns it was too broadly defined and could run into legal issues after the government took steps to nationalize Uniper SE, the country’s biggest buyer of Russian gas.

The funding mechanism allows Lindner, a fiscal hawk who heds the pro-business Free Democrats, to maintain his pledge to restore a constitutional limit on net borrowing next year. It was suspended the past three years to enable generous spending to help households and businesses cope with the fallout from the pandemic.