Opinion of the European Economic and Social Committee on ‘Follow up to inflation and energy measures and EU energy resilience for essential economic sectors’ (own-initiative opinion)
Date: 2023-07-12
Institutions: European Economic and Social Committee
Subjects: economic consequence, energy consumption, energy crisis, energy demand, energy efficiency, inflation, price increase, price of energy, profitability, social impact








C_2023349EN.01001201.xml










29.9.2023   


EN


Official Journal of the European Union


C 349/12







Opinion of the European Economic and Social Committee on ‘Follow up to inflation and energy measures and EU energy resilience for essential economic sectors’
         
(own-initiative opinion)
(2023/C 349/03)







Rapporteur:



Felipe MEDINA MARTÍN











Plenary Assembly decision


25.1.2023




Legal basis


Rule 52(2) of the Rules of Procedure




 


Own-initiative opinion




Section responsible


Section for Transport, Energy, Infrastructure and the Information Society




Adopted in section


26.6.2023




Adopted at plenary


12.7.2023




Plenary session No


580




Outcome of vote
(for/against/abstentions)


151/1/2




1.   Conclusions and recommendations









1.1.


The purpose of this EESC opinion is to assess the impact of the energy crisis following the COVID-19 pandemic and Russia’s war of aggression against Ukraine on European businesses, their workers and Europeans in general. The EESC notes that wide-ranging problems have arisen throughout the economy. These include disproportionate increases in production costs, reorganisation of supply chains, difficulties in supplying food and other goods, increasing investment costs and loss of purchasing power for European households.












1.2.


The EESC is concerned about the high levels of inflation in Europe due to energy and raw material costs, followed by prices for services and industrial goods. Inflation in Europe is at its highest level since the creation of the euro. The EESC calls on the European institutions to establish control mechanisms such as those set out in the document drawn up by the European Consumer Organisation (BEUC). This should include, for example, fully implementing the measures set out in the draft Council Regulation, which provides for major reform, and redesigning the electricity market. The EESC calls on the EU Member States to implement EU acts that have already been adopted, such as the Clean Energy Package, which helps accelerate the green transition and deepen the internal market.












1.3.


The EESC believes that the amended EU Temporary Crisis Framework needs to be urgently reformed in view of the huge cost increases resulting from the war in Ukraine and the energy crisis. In addition, it recommends applying the Temporary Framework for State Aid in such a way that the aid provided for in the Energy Emergency Regulation and under the Recovery and Resilience Framework applies to all sectors affected by the energy crisis, with a particular focus on key sectors, so as not to undermine the ability of many companies to survive, and to avoid adversely affecting the cost of living for consumers and reducing their ability to find commodities on a daily basis. Moreover, the EESC once again calls for a ‘golden rule’ to be introduced enabling the necessary public investment to be made.












1.4.


The EESC believes that households and key sectors should benefit from plans to reduce the impact of high energy prices. Although very high profits were recorded in some sectors, with a substantial increase of 26,8 % compared to the previous quarter, bankruptcy declarations in the EU reached 113,1 — the highest level ever recorded — according to an index used by Eurostat to measure the level of bankruptcy in the EU compared to the benchmark of 100 in 2015. The EESC calls on the Commission and the Member States to work to ensure that households and key sectors can source energy constantly when measures to reduce demand at peak times are implemented. At the same time, some companies, mainly in the energy sector, have increased their profits in the shadow of existing inflation, as the ECB (1) points out. Profits in this sector have continued to drive inflation in the EU and must be tackled.












1.5.


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, and loss of external economic competitiveness. Based on the ECB’s recommendations, the EESC suggests establishing a ‘green triple T’ criterion to ensure that future interventions are tailored, targeted and transition-proof. Non-selective price measures such as the price cap for certain foods would only prolong the period of high inflation over the long term.












1.6.


The persisting high inflation, in particular due to energy prices, provokes a general loss of purchasing power of European workers, consumers and companies, affecting the living conditions of many families, internal demand and growth. This, together with the maintenance of the monetary policy of increasing interest rates, also negatively affects many companies. The EESC believes social dialogue in the energy sector is important to find the appropriate decisions at the national level.












1.7.


The EESC calls on governments to encourage businesses and households to implement energy-saving and -efficiency measures that will enable energy demand to be permanently reduced. To this end, the expansion of renewable energy should be encouraged (by setting the necessary legal and fiscal conditions, including introducing an ‘investment golden rule’) in order to reduce our dependence on fossil fuels. The current situation should be used as an incentive to speed up the decarbonisation of the EU economy. These measures should be accompanied by non-relocation guarantees linked to financial aid. It is time to make the necessary investment (and establish the required fiscal framework conditions) in Europe’s energy transition to reduce dependence on fossil fuels. Furthermore, the EESC is in favour of pressing forward with the changes proposed under REPowerEU to streamline and accelerate the granting of permits for installing renewable energy infrastructure. In this regard, the EESC urges the EU and the Member States to consider how to ensure that the price paid for excess energy fed into the grid enables viable investments to be made to maximise capacity for generating renewable energy and sharing it when it exceeds the generator’s own needs. The Commission’s long-term agenda should include revamping the energy market in order to avoid future disruption of energy supply and exorbitant prices.




2.   General comments









2.1.


The wave of inflation sweeping across Europe is widespread and two phases can be clearly distinguished. The first stemmed from the recovery period following the lockdowns imposed on the population during the COVID-19 pandemic. Relaunching all sectors at once created bottlenecks in supply chains that increased the costs of raw materials and transport freight. Raw material prices grew by 101 % between January 2020 and March 2022 (2), and freight costs by 545 % in the same period (3).












2.2.


In February 2022, Russia’s war of aggression against Ukraine and the subsequent war triggered a second phase of inflation. On this occasion, the shock was concentrated on energy and some products of which both Russia and Ukraine were major suppliers to the EU: natural gas, wheat, sunflower oil and fertilisers. Between February and April 2022, the prices of these goods increased by 18,6 %, 16,8 %, 38,6 % and 16,7 % respectively (4). These costs have since been contained, although in March 2023 the IMF primary commodity price index was still 40,9 % above January 2020 levels and freight still 3,6 % above.












2.3.


These developments have been reflected in the global and European economy in the form of inflation. The year-on-year rate of change for the euro area harmonised index of consumer prices (HICP) (5) reached 11,5 % (Eurostat) in October. Values this high have not been reached since the last century and, although they have fallen slightly in recent months (in March 2023 the rate was 8,3 %), they are proving very difficult to bring down. The evidence that the price shock will not be short-lived, as originally thought, is that underlying inflation (excluding energy) is on an upward trend in most of Europe. This may mean that the monetary policy launched by the ECB is not delivering the expected results.




3.   Impact of inflation on the European economy









3.1.


The EESC notes that the economic outlook worsened following Russia’s invasion of Ukraine in February 2022. The economic trend for the coming years is expected (6) to cool compared to 2022, although these projections are improving over the months. While in winter the Commission predicted a slight increase in GDP of 0,8 % in 2023 and a modest increase of 1,6 % in 2024 for the EU as a whole, in the recent spring forecast these percentages rose to 1,0 % and 1,7 % respectively. At the same time, inflation is expected to gradually reduce, albeit at a slower pace than initially forecast (9,2 % in 2022, 6,7 % in 2023 and 3,1 % in 2024). The labour market will be under strain due to low growth, and public debt is rising because of, among other things, the ECB’s sharp increase in interest rates, which will exert budgetary pressure on most Member States.












3.2.


The 96,5 million Europeans at risk of poverty or social exclusion are the most affected by high inflation. In a Eurobarometer survey, 41 % of respondents said that prices, inflation and the cost of living were among the biggest problems facing their country, ahead of health (32 %) and the economic situation (19 %).












3.3.


The EU has experienced an almost total cut-off of gas supplies from Russia as a consequence of the policy decisions adopted, and almost half of the Member States have been affected by reduced deliveries to a greater or lesser extent. Rising inflation and commodity prices, labour shortages and disruptions in global supply chains are negatively affecting Europe’s food and non-food supply chains. According to the OECD economic outlook, global growth is set to decelerate sharply to around 2,2 % in 2023.












3.4.


According to the ECB, the increase in energy prices has been responsible for two thirds of the inflation differential in the euro zone. According to the Commission, between 2019 and 2022 the increase in profit margins was 54 % in the energy sector, where wages only grew by 6 %. The general loss of purchasing power of European workers, consumers and companies is not only affecting the living conditions of many families, but if not rectified, it could also affect domestic demand and growth and thus other business sectors; all this also due to the continuity of the monetary policy of increasing interest rates. The EESC believes social dialogue in the energy sector is important to find the appropriate decisions at the national level.












3.5.


While consumer prices have risen in general in Europe, the pay trend has been less volatile, reducing the purchasing power of Europeans, especially the most vulnerable, who do not have the means to protect themselves against inflation. In fact, changes in consumer behaviour can already be observed due to the loss of purchasing power of households facing a major cost of living crisis caused by the sharp rise in energy bills and the impact of inflation. The tools used by the Member States to protect vulnerable household consumers vary considerably and, in some cases, they may have limited effectiveness. The European Commission should consider exploring minimum standards to be applied by regulators and policymakers to protect and support vulnerable household consumers.












3.6.


One of the sectors that is suffering the most from the combined impact of the pandemic and the war is food production — agriculture, livestock farming and the food industry — and its distribution to the final consumer. The proximity of the war and its impact on the energy and raw material markets is creating a price gap for agricultural products between Europe and international markets, where European prices have risen the most. Thus, according to the commodity price dashboard for April 2023, the price growth rate for most European agricultural products is higher than the global rate, especially for meat products. This trend is having three major effects. Firstly, Europeans are experiencing the highest level of inflation for all the products they need most. Secondly, European food products are becoming less competitive internationally. Thirdly, the prices paid to farmers have risen as a result of higher production costs.












3.7.


Russia’s war of aggression against Ukraine triggered huge challenges in the food supply chain beyond spiralling energy costs, namely an increase in the prices of key inputs (feed, fertilisers) and shortages of certain commodities (e.g. vegetable oils and wheat) that are needed to maintain a fully functioning supply chain. The domino effect of rising costs is leading to decisions to cut fertiliser production, which will further drive up prices. The droughts experienced across Europe in summer 2022 and thus far in 2023 are exerting greater pressure on prices because available supply is being reduced.












3.8.


Some key sectors — including businesses and workers — that cannot shut down their operations regardless of the situation are facing a double burden: fewer consumers willing to pay and growing costs — particularly sky-high energy bills. Businesses in the food sector have tried to limit the increase in costs to ensure competitive prices for consumers and are now fearing a consumer crisis (Hidalgo, M., 2023 (7); Eurocommerce, 2023). Recently, the government of Spain has published (8) in its first report of the margins observatory that margins among the food chain have decreased by 25 % since 2021, so that it is clear that the evolution of profit margins is very heterogeneous.




At the same time, some companies, mainly in the energy sector, have increased their profits in the shadow of existing inflation, as the ECB (9) points out. Profits in this sector had continued to drive inflation in the EU and must be tackled.








3.9.


The Bank of Spain (10) refers to the very positive effects that the so-called ‘Iberian exception’ or ‘Iberian mechanism’ has had on the electricity market pricing system. It also talks about the positive impact, although more limited, of the VAT reduction on food and fuel prices, although it adds that the measure would have had a lower cost if it had focused on aid for the lower-income families. The Bank of Spain also refers to the positive impact that the increases that the Government of Spain has made in the minimum interprofessional wage, pensions and minimum vital income have had to alleviate the effects of inflation on lower-income households.




4.   The impact of rising energy costs on the profitability of European companies









4.1.


Wholesale electricity and gas prices have increased by up to a factor of 15 since the beginning of 2021, with severe consequences for consumers and businesses. European governments have started implementing a set of policy responses. One type of policy is aimed at mitigating the impact of increased costs on consumers and businesses. Other measures seek to stabilise and reduce wholesale prices and ensure energy security. The EESC urges the European Commission and the Member States to undertake a comprehensive reform of the electricity market design and electricity price calculation system in line with opinion TEN/793 (11).












4.2.


Energy prices are affecting businesses’ costs in very different ways: firstly, through the cost of the electricity supply itself; secondly, indirectly, through the impact on the rest of the supply chain; and thirdly because of the possible financial consequences of this. By way of example, a study by the Bank of Spain published ex ante in spring 2022 (12) estimated that a cumulative increase of 25 % in businesses’ energy costs would reduce their gross value added (GVA) by 1,6 % in 2023. However, this is the average impact. The study found that some sectors are suffering more than others. The oil and natural gas extraction sector is benefiting the most. The sectors that would suffer the most harm are: fishing and aquaculture, land transport, waterborne transport, motor vehicle trade and repair, agriculture and livestock farming, education, air transport, real estate activities, manufacture of coke and refined petroleum products, health and social services, and hospitality services. Some of these sectors showed during the pandemic how important they are for a well-functioning EU economy. Many of the most affected sectors are not electricity-intensive in their productive operations but are major consumers.












4.3.


As well as the direct and indirect impact on businesses’ GVA (margins), greater financial vulnerability also has an impact. The Bank of Spain report identifies the sectors that are hardest hit. One group of sectors would be particularly vulnerable; not only would they have excessive debt, but they would also have negative profitability in 2023: motor vehicle trade and repair; land and pipeline transport; fishing and aquaculture; agriculture and livestock farming; and textiles, clothing, leather and footwear.












4.4.


As the accumulated stocks of natural gas in Europe decrease — the volume being stored in May 2023 was 68 % (13) — we will face additional challenges in managing our energy policy. There is still a difference between the quantities previously supplied from Russia and those from alternative suppliers and, therefore, prices are unlikely to drop in the short term. What has happened is a significant reduction in demand. The high energy prices are making our industry and our supply chains less competitive, in turn encouraging operations to be outsourced outside the EU, thus reducing the bloc’s strategic independence. The impact on households, in particular the most vulnerable, is particularly significant, with a growing proportion of people at risk of or living in poverty. This will be the case until at least 2024 (14). In order to combat these issues, the EESC recommends a number of measures including location guarantees linked to financial support, further necessary energy saving and energy efficiency measures for companies to reduce demand, massive investments and the necessary fiscal framework conditions in the expansion of renewable energy production to reduce dependence on fossil fuels.












4.5.


Consequently, due to the rocketing energy costs, the viability of many businesses and households is increasingly coming under threat. Although the winter was relatively warm, we cannot expect the environmental conditions to always be favourable to us. For this reason, measures must be taken to protect particularly vulnerable households, with specific measures being adopted for them in this area.












4.6.


For businesses, the huge increases in business costs, combined with consumer reluctance to spend, may even lead to mandatory relocation in some cases. However, this is not possible for companies which provide an essential service to customers and the rest of the supply chain, who cannot simply stop their operations due to energy price increases.












4.7.


While a large number of sectors and their workers were considered essential during the COVID-19 pandemic, this recognition is notably absent in the current energy crisis. So far, Member States have not provided specific support to many of these sectors. Businesses in these sectors and their workers have made an effort to protect consumers at the expense of their own margins and it is hard for them to pass on to customers the total cost of the exorbitant increase in energy bills. This situation cannot be maintained in the long term. Similarly, the EESC believes that governments are not protecting people to the same extent as they were during the pandemic.












4.8.


Many businesses are making a number of investments to reduce energy consumption and improve their capacity to access more renewable energy. The EESC believes that companies can also act as accelerators in the electrification of transport and can replace gas in heating, thereby playing a key role in the energy transition and in the EU’s renewable energy targets for 2030. However, this will require a favourable regulatory framework, such as granting permits and combating price disincentives for producing more energy.












4.9.


The EESC stresses the importance of aligning the REPowerEU and energy performance of buildings obligations with support and with operators’ capacity to bear the cost of the considerable investments they entail. These measures will be important in reducing dependence on fossil fuels, but the obligations must be linked to the availability of both public and private funding. The Commission’s long-term agenda should include revamping the energy market in order to avoid future disruption of energy supply and exorbitant prices. This revamp should consider training for the workforce that will be involved in the sector.




In the same vein, the EESC believes that the practical aspects related to the availability of equipment and skilled labour should also be reflected in the programmes’ obligations to install fast charging stations for vehicles and infrastructure for alternative fuels. It must be ensured that the funds disbursed through the new proposals can be used to ensure that this transition can be carried out within the deadlines set.


Brussels, 12 July 2023.


The President of the European Economic and Social Committee

Oliver RÖPKE
            





(1)  ECB study on inflation, 2023.

(2)  IMF primary commodity price index, available at https://www.imf.org/en/Research/commodity-prices.

(3)  Freightos Baltic Index, available at https://fbx.freightos.com/.

(4)  IMF primary commodity price index, available at https://www.imf.org/en/Research/commodity-prices.

(5)  Eurostat, available at https://ec.europa.eu/.

(6)  https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/economic-forecasts/spring-2023-economic-forecast-improved-outlook-amid-persistent-challenges_en.

(7)  Margins and profits of Spanish food retailers in 2022.

(8)  OME Informe Trimestral 2023T3 (bde.es).

(9)  ECB study on inflation, 2023.

(10)  https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/PublicacionesAnuales/InformesAnuales/22/Files/InfAnual_2022_En.pdf.

(11)  Opinion of the European Economic and Social Committee on the proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) 2019/943 and (EU) No 2019/942 as well as Directives (EU) 2018/2001 and (EU) 2019/944 to improve the Union’s electricity market design (COM(2023) 148 final — 2023/0077 (COD)) (OJ C 293, 18.8.2023, p. 112).

(12)  Available at: https://www.bde.es/f/webbde/Secciones/Publicaciones/InformesBoletinesRevistas/InformesEstabilidadFinancera/22/IEF_2022_1_Rec1_4.pdf.

(13)  Information available at: https://agsi.gie.eu/data-overview/eu.

(14)  
            EIU (2023): Energy crisis will erode Europe’s competitiveness in 2023, available at: https://www.eiu.com/n/energy-crisis-will-erode-europe-competitiveness-in-2023/.