Energy crunch strains European budgets with risks beyond winter

Europe's energy crunch is straining budgets as governments boost spending to help consumers and companies weather a spike in heating and electricity costs that risks extending beyond the winter.

Record-high power prices have quickly become one of the continent's biggest political challenges, with European Union leaders, who've already spent big on pandemic stimulus, set to discuss the issue again at a summit on Thursday.

Of the bloc's 27 members, 20 have acted to soften the blow for the most vulnerable consumers and households -- most effectively via tax cuts, according to the European Commission.

Relief including income support, vouchers and other time-limited tools will exceed 3.4 billion euros ($3.8 billion) and help lower energy bills for about 41 million customers and 7.6 million small companies, it said in a document sent to governments before the meeting.

Italy, for one, will set aside an extra 1.8 billion euros to protect consumers, people familiar with the matter said this week. Total enacted and planned actions by EU nations will reach tens of billions of euros, the Bruegel think-tank in Brussels estimates.

"These are sizeable measures," said Simone Tagliapietra, a senior fellow at Bruegel. "Such numbers suggest that the public-finance sustainability of these measures can't last long, and that a protracted energy-price crisis will dent governments' capacity to shield consumers."

The risks for Europe are mounting. Natural gas stockpiles are at record lows for the time of the year, while Russia -- the EU's biggest supplier of the fuel -- is massing troops on its border with Ukraine, threatening a conflict that could further crimp supply.

Embroiled in that standoff is the fate of Russia's controversial Nord Stream 2 gas pipeline to Germany. Poland said last week that the energy market will remain volatile until there's a final decision to approve the project. German Chancellor Olaf Scholz has pledged to "do everything" to stop the Kremlin using the link to cripple flows through Ukraine.

In nearby Belarus, meanwhile, additional geopolitical tensions are bubbling up. President Alexander Lukashenko has reiterated threats to halt Russian energy supplies that transit his country if the West presses ahead with sanctions in a dispute over migrants.

The EU's longer-term plan to ease the pain for consumers and businesses has been set -- tougher energy-storage rules to ensure higher reserves for the heating season and, later, a shift away from imported fossil fuels to domestically produced renewable sources.

Right now, however, budgets already stretched by Covid-19 could limit the scope for EU governments to offer much more in the way of support.

— With assistance by Zoe Schneeweiss

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.