Europe: Bracing For A Cold Winter

Rationing is the controlled distribution of scarce resources or a restriction of demand. It is an extreme measure typically undertaken in response to natural disasters, trade restrictions or wars, to mitigate the impact of scarcity.

Those living in the developing parts of the world are well familiar with the concept. For instance, the demand-supply gap in India regularly leads to power shortages or rationing of electricity. But at the moment, developed economies across Europe are facing the challenge of stretching scarce resources.

Russia has been increasingly weaponizing energy in its economic battle with the West. Natural gas flows through the important Nord Stream 1 pipeline to Germany have been suspended, escalating prices and raising the likelihood of rationing. European gas prices are now about ten times their average over the past decade. One-third of Europe’s energy comes from gas, which is used for generating electricity, transport and heating.

The rise in household energy bills and corporate sector energy costs are weighing on economic activity. Soaring energy bills are impairing household finances. Various industries, from fertilizer manufacturers to zinc smelters, are struggling to pay the cost of fuel. European energy trading is strained as companies find it difficult to guarantee trades amid wild price swings.

Governments are stepping in with measures to keep a lid on costs. According to Bruegel, European governments have allocated €450 billion to shield consumers and businesses from rising energy bills, an amount more than half of the post-pandemic NextGenerationEU program. Some EU nations have already launched windfall tax measures to subsidize household bills.

On average, European Union member states have allocated about 2.5% of gross domestic product (GDP) to offset the surge in energy prices. While most European countries have lowered taxes on petrol and diesel, they differ in their approaches and spending. Germany has provided a one-time €300 allowance for income tax paying workers. Italy has put in place a one-off €200 “cost of living bonus” for most salaried workers, self-employed workers and pensioners. In France, the government has put a freeze on gas prices for consumers, as well as a 4% cap on electricity price increases. The Norwegian government is paying 90% of households’ electricity bills when wholesale prices exceed prescribed thresholds.