Europe’s energy crisis increases risk of deindustrialisation

Good morning and welcome to Europe Express.

There was a collective sigh of relief yesterday when it became evident that Russia has not escalated its war in Ukraine and shot missiles at a Nato country. But the fallout from the existing conflict on the EU’s doorstep — high energy costs, rising inflation and a looming recession — is still very much present. We’ll look at the less positive implications of the much-trumpeted reduction in industrial energy consumption.

In slightly more positive news, the European Commission yesterday gave a resounding endorsement of Bulgaria, Croatia and Romania joining the border-free Schengen area as soon as possible. I’ll run you through the chances for the three countries to join next year.

And we’ll hear about the latest regulatory climbdown when it comes to the use of pesticides in the EU.

Industrial malaise

As the EU squabbles over whether and how to cap gas prices to support the economy, it likes to point to one success — demand reduction. But on the flipside, reduced energy consumption also means less industrial output and, in some cases, permanent shutdowns, writes Andy Bounds in Brussels.

Consumption fell by a quarter in October compared with the 2019-21 average for the month, according to Bruegel think-tank. This “lowers energy bills, ends Vladimir Putin’s ability to weaponise his energy resources, reduces emissions and helps rebalance the energy market,” said executive vice-president Frans Timmermans in September.

Some business leaders see it differently. Fredrik Persson, president of BusinessEurope, says much of the drop comes from companies cutting production or even closing. He points to Italy, where gas consumption fell 24 per cent in October.

“People say, ‘OK, you’ve been really good at saving’, but when we really talk to our Italian friends they say, ‘no, that was because people are cutting back on production’.”

However, most do not broadcast their woes. “It’s a bit like drowning — you think people would shout when it is happening. But this is done quietly.”

Other countries have had even bigger drops. In Portugal it was 48 per cent and Romania 78 per cent. Portugal’s ceramics industry, which needs gas to fire its kilns, has suffered, Persson said.

He said EU companies faced a “serious loss of competitiveness” as wholesale gas prices are five to seven times higher in Europe than Asia and the US. 

BASF, the German chemical company, said recently it would expand production in China and “downsize permanently” in Europe because of high energy prices and faltering demand.

In Germany, industry accounts for a quarter of demand. Figures show that production in the energy-intensive industries started falling in February and has been below the level of the overall industry since May 2022.

In a September survey from the Association of German Chambers of Industry and Commerce, 8 per cent of respondents were considering shifting production somewhere else owing to high energy prices in Europe.

Persson urged energy ministers meeting on November 24 to back plans to tackle high prices including a mechanism to stop the gas price driving up electricity prices.

“There is still time,” he said. “If we could get a grip on the energy price . . . we could restore the comfort of investments and doing business in Europe. Our members want to be in Europe.” 

Chart du jour: Growing numbers

Behind the Franco-Italian spat over migration and how to handle NGO rescue ships lies the reality of an increasing number of people attempting to cross the Mediterranean into Europe.

Schengen enlargement

The EU commission yesterday urged member states to let Bulgaria, Croatia and Romania into the border-free Schengen zone “without any further delay”, because they have a “strong record of achievements” (listed in this report). But the answer to that lies with the Netherlands and Sweden, not Brussels.

Croatia is still new to the Schengen enlargement waiting line, where Bulgaria and Romania have been standing for over ten years. But with Zagreb on track to adopt the euro on January 1 and its readiness for Schengen not contaminated by fears of corruption and rule of law issues (as it is the case with Bucharest and Sofia), it might just squeeze ahead.

That is, if the new government in Sweden manages to convince the far-right Sweden Democrats to lift their opposition to any country joining Schengen anytime soon. Adding to the complexity of Swedish parliamentary calculations is a recent U-turn in the centre-left opposition, which had been in government until recently and supportive of Schengen enlargement.

“It’s high time to say welcome,” the home affairs commissioner Ylva Johansson (herself a Swedish Social Democrat). “These three members states deserve to feel fully European. The wait has been long.”

The Swedish complications come on top of longstanding reservations expressed by the Dutch government and parliament in regards to Bulgaria and Romania, because of issues with corruption and the rule of law. Here too, however, there is some recent movement. The Romanian government opened itself to extra scrutiny from an inspection team that includes Dutch experts and the commission promised to issue a report on the rule of law and anti-corruption reforms in the coming weeks (both were Dutch pre-conditions).

Romanian foreign minister Bogdan Aurescu said in Bucharest that he is continuing diplomatic efforts with both the Netherlands and Sweden, adding that his Swedish counterpart reassured him of his government’s support.

A remark by German chancellor Olaf Scholz in his August speech on Europe supporting all three countries’ bids also revived hopes for some movement on this front. But whether all this will get them over the line is unclear yet. A decision could be taken at the next justice and home affairs council on December 8-9.

Pest-killers, very much alive

The EU commission has offered to reverse plans to ban the use of pesticides in large parts of Europe after they met fierce resistance from many countries, writes Andy Bounds.

Instead of banning their use in public places, sports grounds, water catchment areas and protected areas such as nature reserves, Brussels is now prepared to allow biocontrol, low-risk and other approved substances as well as all products allowed in organic agriculture.

Commission officials unveiled a draft outline of changes to the pesticides regulation at yesterday’s meeting of ambassadors.

“The [original] proposal is seen as too ambitious and affecting a disproportionately high area of member states’ territory,” the document, seen by Europe Express, says.

Some 40 per cent of Slovenia, for example, is a protected area including lots of farmland. In some countries the entire territory is designated as a water catchment area.

The commission wants to allow governments more discretion to define the most sensitive areas.

Around 10 mostly central European states have been blocking progress of the proposed regulation, published in June, which seeks to cut pesticide use in half by 2030 and encourage alternative methods of pest control.

The changes will still have to be agreed by member states. And there remain thorny problems. The commission has proposed a 50 per cent reduction per country and an outright ban in some areas, but nations with lower pesticide use, such as Poland, want the same allocation for all 27 members. There are also complaints about the cost of administering the system.

Health commissioner Stella Kyriakides will doubtless say she has listened to national politicians. But green groups will say she has ignored them, possibly setting up a confrontation with the European parliament, which tends to be more ambitious in environmental legislation.

What to watch today

1. UK chancellor Jeremy Hunt presents fiscal statement

2. EU commission vice-president Frans Timmermans holds news conference at COP27

3. Dutch court issues verdict about the downing of Malaysia Airlines Flight 17 over eastern Ukraine in 2014

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