# IMMC.EESC-2023-00493-AC.ENG.xhtml.EESC-2023-00493-00-00-AC-TRA-EN.docx

| OPINION |
| --- |
| European Economic and Social Committee |
| The impact of the energy crisis on the European economy |
| _____________ |
| The impact of the energy crisis on the European economy


  [own-initiative opinion] |
| |
| TEN/800 |
| |
| Rapporteur: Alena MASTANTUONO |

OPINION

European Economic and Social Committee

The impact of the energy crisis on the European economy

_____________

The impact of the energy crisis on the European economy

[own-initiative opinion]

TEN/800

Rapporteur: Alena MASTANTUONO

EN

Plenary Assembly decision

| Plenary Assembly decision | 25/01/2023 |
| --- | --- |
| Legal basis | Rule 52(2) of the Rules of Procedure |
| | Own-initiative opinion |
| Section responsible | Transport, Energy, Infrastructure and the Information Society |
| Adopted in section | 16/05/2023 |
| Adopted at plenary | 14/06/2023 |
| Plenary session No | 579 |
| Outcome of vote
  (for/against/abstentions) | 194/4/10 |

Plenary Assembly decision

25/01/2023

25/01/2023

Legal basis

Legal basis

Rule 52(2) of the Rules of Procedure

Rule 52(2) of the Rules of Procedure

Own-initiative opinion

Own-initiative opinion

Section responsible

Section responsible

Transport, Energy, Infrastructure and the Information Society

Transport, Energy, Infrastructure and the Information Society

Adopted in section

Adopted in section

16/05/2023

16/05/2023

Adopted at plenary

Adopted at plenary

14/06/2023

14/06/2023

Plenary session No

Plenary session No

579

579

Outcome of vote
  (for/against/abstentions)

Outcome of vote
  (for/against/abstentions)

194/4/10

194/4/10

1.Conclusions and recommendations

1.

Conclusions and recommendations

1.1The biggest impacts of the energy crisis are inflation and the strain on public finances. Energy prices driven by gas and oil prices were the catalyst for inflation and severely impacted low- and middle-income households and energy-intensive businesses. High inflation was the most visible phenomenon of the 2022 economic performance, with a knock-on effect on other elements of the consumer basket and a strong impact on consumption and behaviour. The very high level of bankruptcy declarations in the EU also shows the seriousness of the situation.

1.1

The biggest impacts of the energy crisis are inflation and the strain on public finances. Energy prices driven by gas and oil prices were the catalyst for inflation and severely impacted low- and middle-income households and energy-intensive businesses. High inflation was the most visible phenomenon of the 2022 economic performance, with a knock-on effect on other elements of the consumer basket and a strong impact on consumption and behaviour. The very high level of bankruptcy declarations in the EU also shows the seriousness of the situation.

1.2Adding to the impact of the energy crisis were the previous negative consequences of the COVID-19 pandemic, which significantly weakened the EU's economic performance after the biggest drop in GDP growth for many decades. Some sectors might suffer more from this cumulative effect. It also makes it difficult to have the overall picture of the impact of the energy crisis on the economy, due to the lingering effects of the COVID-19 pandemic. The fact that today's statistical data in some areas, such as employment, are somewhat positive certainly does not mean that the situation is perfect. A clear analysis of the economic impact can only be carried out when the crisis is over and when all detailed data are available.

1.2

Adding to the impact of the energy crisis were the previous negative consequences of the COVID-19 pandemic, which significantly weakened the EU's economic performance after the biggest drop in GDP growth for many decades. Some sectors might suffer more from this cumulative effect. It also makes it difficult to have the overall picture of the impact of the energy crisis on the economy, due to the lingering effects of the COVID-19 pandemic. The fact that today's statistical data in some areas, such as employment, are somewhat positive certainly does not mean that the situation is perfect. A clear analysis of the economic impact can only be carried out when the crisis is over and when all detailed data are available.

1.3The energy crisis has impacted the economy in terms of high inflation, weak economic growth, strong pressure on public finances, and the purchasing power of households and businesses, as well as a loss of external economic competitiveness. Building on the ECB recommendations, the EESC suggests establishing a "Green triple-T" criterion so that future interventions are tailored, targeted and transition-proof. Untargeted price measures would only prolong the period of elevated inflation in the longer run.

1.3

The energy crisis has impacted the economy in terms of high inflation, weak economic growth, strong pressure on public finances, and the purchasing power of households and businesses, as well as a loss of external economic competitiveness. Building on the ECB recommendations, the EESC suggests establishing a "Green triple-T" criterion so that future interventions are tailored, targeted and transition-proof. Untargeted price measures would only prolong the period of elevated inflation in the longer run.

1.4The EESC is convinced that the lesson to be learned from the negative effects of the energy crisis on the EU's economic performance must be reflected in the next policy steps. The energy crisis, mainly triggered by Russia's invasion of Ukraine, revealed and identified some of the substantial weaknesses and disruptions in the EU economic system, which must be structurally improved and adjusted so that it can face similar exogenous shocks more effectively, mainly in terms of resilience, efficiency and strategic autonomy.

1.4

The EESC is convinced that the lesson to be learned from the negative effects of the energy crisis on the EU's economic performance must be reflected in the next policy steps. The energy crisis, mainly triggered by Russia's invasion of Ukraine, revealed and identified some of the substantial weaknesses and disruptions in the EU economic system, which must be structurally improved and adjusted so that it can face similar exogenous shocks more effectively, mainly in terms of resilience, efficiency and strategic autonomy.

1.5The EESC believes the EU needs to move beyond emergency fiscal responses and focus on structural changes to allow it to decouple from fossil fuels more quickly. To ensure its smooth and competitive economic development, the EU needs reliable and secure deliveries of affordable energy based on an integrated energy market with a large share of clean energy, which is resilient and able to face disruptions and shocks.

1.5

The EESC believes the EU needs to move beyond emergency fiscal responses and focus on structural changes to allow it to decouple from fossil fuels more quickly. To ensure its smooth and competitive economic development, the EU needs reliable and secure deliveries of affordable energy based on an integrated energy market with a large share of clean energy, which is resilient and able to face disruptions and shocks.

1.6It strongly endorses all policy steps to reduce inflation sustainably over the course of this year and is in favour of economic recovery based on investments in the green, digital and strategically important sectors and industries, supporting the EU industrial base and global competitiveness, while using all of advantages of the single market. It is absolutely vital that production of clean technologies becomes a business case for Europe. The social partners want to ensure, at all costs, that knowledge, skills and the production base do not leave Europe. To ensure smart independence, industry – and the jobs it creates – has to stay in Europe. Therefore, being competitive and creating quality jobs must become a way of life and central to making and implementing our policies.

1.6

It strongly endorses all policy steps to reduce inflation sustainably over the course of this year and is in favour of economic recovery based on investments in the green, digital and strategically important sectors and industries, supporting the EU industrial base and global competitiveness, while using all of advantages of the single market. It is absolutely vital that production of clean technologies becomes a business case for Europe. The social partners want to ensure, at all costs, that knowledge, skills and the production base do not leave Europe. To ensure smart independence, industry – and the jobs it creates – has to stay in Europe. Therefore, being competitive and creating quality jobs must become a way of life and central to making and implementing our policies.

1.7The implementation of the Green Deal including the transition to a carbon neutral economy and maintenance of a competitive EU industry requires vast investments from public and private sources. However, the EU lacks a long-term framework for robust financing of the Green Deal implementation. The EESC therefore asks for an adequate framework in order to support measures financing the transition to a climate neutral economy in a simple and efficient manner.

1.7

The implementation of the Green Deal including the transition to a carbon neutral economy and maintenance of a competitive EU industry requires vast investments from public and private sources. However, the EU lacks a long-term framework for robust financing of the Green Deal implementation. The EESC therefore asks for an adequate framework in order to support measures financing the transition to a climate neutral economy in a simple and efficient manner.

1.8In times of crisis and uncertainty, objective information and strong political leadership are crucial. The EESC therefore recommends continuing to ensure appropriate communication, including throughout the period when the consequences of the crisis are being addressed. The reform of the energy market and system will have an impact on all industries and consumers; it is absolutely essential for stakeholders to have their say in the legislative process, and be adequately informed about this fundamental transition.

2.Basic facts and context

2.1The energy crisis and its impact on people's lives and business prosperity is still ongoing. This makes it difficult to measure its final overall impact on the economy. We can, however, surely declare that the biggest impact of the crisis has been reflected in inflation (the highest for many decades) and the public finances (having played a strong role in mitigating the impacts of high prices and costs and massively supporting investments to make them less vulnerable). The cause of high energy prices was the skyrocketing gas prices
  1
  .

2.2It is appropriate to recall the Energy Union's key milestones which have specifically set the course of the energy system's future development. Some of its pillars, especially those relating to energy security, have been recently underestimated, mainly owing to a strong focus on and preference for cheap Russian gas, at the time considered a temporary source during the green economic transition and to the purely political hasty exit from stable clean sources.

2.3Regarding the different energy mix in the EU Member States, which reflects, among other aspects, their geomorphologic conditions, meeting the Energy Union's targets is strongly influenced by national circumstances. This factor is visibly reflected in the speed of the EU's green transition. One thing, however, remains clear: the key priority of the Energy Union during the crisis was the security of supply, which was sometimes at odds with the green transition targets.

2.4The current energy crisis has revealed how serious the vulnerability of the EU energy system is and how important it is to pursue the open strategic energy autonomy of the whole energy industry chain. At the same time, it has demonstrated its ability to face and absorb robust exogenous shocks and their consequences. The energy crisis was triggered by a mix of economic, political and technical elements. The crisis began with economic upheaval following the COVID-19 pandemic which pushed up global energy demand, while third country interference and low levels of gas storage in some European countries during the 2021/2022 winter season combined with higher demand underlined the gravity of the situation. The already difficult situation then worsened with Russia's invasion of Ukraine in February 2022, exacerbated by the EU's dependence on fossil energy sources, with a strong direct influence on energy prices and supply security.

2.5The impact of the energy crisis on the EU economy has been damaging. In 2022, it directly contributed to all-time record inflation in the recent history of EU integration, with average EU inflation at 9.2%
  2
  , which is expected to fall to 6.7% (still very high) in 2023 and 3.1% a year later
  3
  . High inflation had been the most visible phenomenon of the 2022 economic performance, with a knock-on effect on other elements of the consumer basket and a strong impact on consumption and behaviour. This has had an enormous impact on households and businesses. It is not only the most vulnerable who have suffered because of price hikes. Low- and middle-income households have been heavily affected and energy poverty rates might rise. All this deeply affected personal finance and consumer confidence in the EU; most consumers have adapted their habits to cope during the energy crisis. Consumer sentiment hit a record low in September 2022 and then slightly recovered thereafter.

2.6The situation has also negatively influenced the position of businesses. With a substantial increase of 26.8% compared with the previous quarter, bankruptcy declarations in the EU reached 113.1 – the highest level ever recorded, following an index used by Eurostat to gauge the bankruptcy level in the EU compared to the benchmark of 100 in 2015. Data show that the index started to increase in the second quarter of 2020 and went up significantly throughout 2022. The figure in the fourth quarter of 2022 reflected a deteriorating situation in which companies, especially SMEs, were grappling with falling demand, tighter credit standards
  4
  , and a gloomy and uncertain future.

2.7The energy crisis has also had negative effect on the EU's economic performance, mainly in terms of private consumption (its decrease is considered to be the main reason behind the GDP stagnation), investments (despite huge potential in investment activity, the investment gap has actually been increasing since 2021), and external competitiveness (with a substantial worsening in comparison with the pre-2020 period.). Overall EU GDP, after a solid performance of 3.5% growth in 2022, is predicted to grow slightly (1.0%) in 2023 and modestly accelerate (1.7%) in 2024.

2.8Another additional burden coming directly from the energy crisis is the performance of public finances. In 2022, the average budget deficit amounted to 3.4% of GDP
  5
  , and quite similar figures (exceeding the Stability and Growth Pact requirements) are estimated for the next two years as well. The energy crisis together with the green transition place significant pressure on public spending, while a prudent approach should be used in order to maintain fiscal balance. A broader utilisation of private investment leveraging based on guarantee schemes (EFSI-type) should be the model for allocating sufficient investments in a fiscally prudent way.

2.9So far, the aggregated statistic data regarding the impact of the energy crisis on the labour market have not been negative. In December 2022, the unemployment rate was 6.1% in the EU (unchanged since April). These were the lowest figures since 2000. However, the slowdown in economic activity estimated at the end of last year and projected in early 2023 is set to hinder the pace of employment growth. Energy-intensive companies were hit hard by the crisis and major challenges are expected for the future labour market.

2.10In 2022, the energy crisis combined with a mild winter, savings and interrupted business operations led to a decrease in electricity consumption (-4.6%). According to ACER, the fall in demand accelerated throughout the year; it was five times higher in the fourth quarter of 2022 than in the first quarter. The drop in demand increased from -1.8% in the first quarter to -9.5% in the fourth quarter, when compared with the same periods in 2021.

2.11At the same time, the crisis has had some positive aspects. Firstly, in terms of new solutions offering a breakthrough for increased energy efficiency and a boost to (or 'renaissance' of, in some cases) clean technologies. Some companies brought innovative solutions to the market. Secondly, it has highlighted a need for better interconnection of energy markets and solidarity across Member States. The EU institutions as well as the Member States were able to take steps and to react quite quickly and accept the new situation very flexibly.

2.12The crisis has also led to a need to adjust and redefine the main pillars of the EU energy policy: the Energy Union, the Green Deal and its specific elements (especially the Fit for 55 package), and the framework of EU Taxonomy. Responses to the serious situation in 2022 include long-term structural tools such as REPowerEU and the Green Deal Industrial Policy for the Net-Zero-Age, as well as the immediate/short-term measures to prevent the most painful consequences of the crisis from affecting households and businesses.

3.General comments

3.1The EESC stresses that the main cause of the crisis was the EU's high dependence on Russia's gas supplies and proposes setting a long-term vision which will make the EU less energy-dependent on third countries; this also includes independence with regard to clean technologies. The EESC underscores that all EU and national measures must incentivise this strategic shift to secure Europe's strategic autonomy.

3.2The EESC is well aware that the main priority is to address not only the consequences, but above all the reasons and causes of the crisis, and is ready to discuss and propose solutions. This requires gradually moving away from the emergency measures to market-compatible and evidence-based reforms and investments, underpinned by sustainable and feasible strategic concepts. Those strategic concepts must strike a balance between their priorities, financial sources (public and private) and the institutional environment and administrative conditions (permissions, compliance with EU and national legislation), and be based on adequate public support.

3.3The energy-saving measures made by households and businesses helped avert any serious risk of energy shortages. However, it should not go unnoticed that some savings were made only because of the shutdown of business activities. The most vulnerable industries in the crisis logically include the most energy-intensive ones (chemical industry, producers of fertilisers, steel industry and ironworks). Special attention should be paid to them in terms of their energy transition as well as the risk of EU deindustrialisation (carbon leakage).

3.4The basis of the green transition is a strong and interconnected energy infrastructure, which has suffered severe underinvestment in recent years. Infrastructure investment and upgrading will play a key role in the coming years. Therefore, it is important that new rules send a clear and long-term signal to investors. However, the capacity of SMEs to invest in the energy transition has been very limited since the initial crisis (COVID-19) broke out. The reforms must respect the goals of the EU energy policy in terms of the green transition, resilience and social welfare, as well as the huge differences among the energy mix structures of particular Member States. The crisis has had a serious impact on investment certainty.

3.5The EESC is convinced that the key reform requirements primarily include an update of the energy market design to allow for a sustainable green transition. The EESC calls upon the co-legislators to reach a consensus on the main market design categories, directly influencing the future propensity to invest in this sector, including long-term contracts; supportive and incentive instruments for renewables; a model forming the basis of energy price generation and the issue of overall flexibility.

3.6The EU Green Deal, supplemented by the REPowerEU initiative, has the potential to invest approximately EUR 350 bn of yearly investments until the end of the decade (more than 2% of the EU's annual GDP). The short-term EU investment forecast remains substantially weaker. This requires additional financial resources to be mobilised in order to accommodate the priority investment needs. These types of investments could be the trigger for a more robust EU economic recovery and for additional investment in infrastructure, digitalisation of energy networks, interconnection and storage capacities.

3.7The EESC is well aware that huge financial resources are needed for this process. The green transition will not be possible without investment in research, innovation, infrastructure and people who should be properly prepared via education, upskilling and reskilling. Despite the large sums under new EU financing programmes proposed for this purpose, national public and private sources are absolutely essential to make this a reality. The EESC highlights a need for simple, efficient and easy-access financing and calls for innovative methods to engage private capital via financial instruments. The EESC also takes into account the broadened role of State aid support and financing for a targeted purpose, but recommends ensuring a level playing field in the EU.

3.8EU governments earmarked and allocated EUR 758 billion to shield households and firms between September 2021 and January 2023. Only a third of the fiscal interventions put in place by Member States were aimed at vulnerable categories. The EESC recommends building on the ECB recommendations; a "Green triple-T" criterion so that future interventions are tailored, targeted and transition-proof should be established. Untargeted price measures were also defined by the IMF as setting the conditions for an extended period of higher inflation in the longer run. Delaying their phasing out might compromise the ECB's ability to achieve its medium-term objectives, resulting in monetary tightening for longer than is otherwise desirable.

3.9The EESC is convinced that the economic recovery could therefore lead to the creation of new job opportunities and improve the external competitiveness of the EU economy, via the creation of new industries and business projects needed to make the transition to a climate neutral economy successful. Quality upskilling and reskilling will be decisive in order to manage the transition process. It is absolutely vital that production of clean technologies becomes a business case for Europe. The social partners want to ensure, at all costs, that knowledge, skills and the production base do not leave Europe. To ensure smart independence, industry – and the jobs it creates – has to stay in Europe. There is an urgent need to regain ground and the transition to the green economy provides us with such an opportunity provided that it is managed well. Therefore, being competitive and creating quality jobs must become a way of life and central to making and implementing our policies.

3.10Beside the new reform measures, the EU must first focus on implementing and enforcing adopted legislation within the Green Deal. There is also the question of why these measures have not been implemented by the Member States. One of the reasons is that the capacity of Member States to absorb the wave of legislation is very low. The same goes for companies, mainly SMEs.

4.Specific comments

4.1The EESC calls upon the European Commission and its co-legislators to do their utmost to secure a consensus on the key market design parameters and categories. For example, in the case of PPAs, it would be a good idea to define common EU rules on public tenders for them, requirements for related state guarantees, or a framework for incentives for business to utilise the full potential of PPAs. The EESC would like to see results soon. Otherwise, owing to the lack of transparency and long-term predictability, investors will postpone their investment decisions or leave the market and the investments will not be made until the framework is absolutely clear to them.

4.2The EESC is very concerned about the EU's macroeconomic performance in many decades and is well aware of its seriousness. However, it is also aware that the game is not over and that action is needed to improve the situation. The EESC hopes that the biggest danger, inflation, is being brought under control, and if there is no other external shock, the period of a new clean, just and resilient energy system could begin soon.

4.3The EESC strongly recommends making extraordinary measures concerning revenues strictly temporary. To use them for a longer period than necessary may lead to some behavioural changes, social effects and unnecessary market distortion, and act as a disincentive to invest for investors from the industries concerned. For a temporary period, capping policy should flexibly reflect the economic reality and be adjusted to market developments; otherwise it could harm consumers in the event of a drop in electricity prices.

4.4The EESC firmly supports a strengthened system of consumer protection as a lesson from the impact of the current energy crisis on customers. This means a comprehensive service, including legal protection, information and advisory services, detailed instructions, best practice sharing, etc. Special attention should be paid to those at risk of energy poverty.

Brussels, 14 June 2023

Oliver RÖPKE

The president of the European Economic and Social Committee

_____________

Spring 2023 Economic Forecast
  : Eurostat.