Why the EU Cannot Fix the Energy Crisis Alone
Calls for Europe’s intervention overlook the political and financial constraints embedded in the Union’s governance. A commentary by Lorenzo Bini Smaghi
As the energy crisis persists, calls are multiplying for Europe to “do something” to support countries in difficulty. According to some observers, “Europe makes no sense if it does not help member states cope with the current situation”. Some policy makers, in particular in Italy, have even floated the idea that, absent concrete responses from Brussels, countries might have to “go it alone”.
But what, in practice, could Europe do to assist struggling member states such as Italy? And, if necessary, what might countries realistically achieve “on their own”?
It is worth recalling, first of all, that the Europe being asked to “do something” is not a separate entity, but rather the Union of its member states, which take decisions within the European Council on the basis of proposals from the Commission.
Let us consider some of the possible options.
The first would be to transfer financial resources to countries in difficulty. However, the Union does not currently have fresh resources at its disposal. It could raise them by borrowing on financial markets, as it did with Next Generation EU in the aftermath of the Covid crisis.
These funds could then be distributed—either as grants or loans—to member states according to predefined criteria. Under Next Generation EU, Italy received the largest share because it was hit earlier and more severely by the pandemic than other countries, and because its economic situation was weaker.
That model would be difficult to replicate today. It would require demonstrating that Italy is the country most affected by the energy crisis, and for reasons beyond its control.
In reality, while Italy is particularly exposed to rising energy prices, this is largely the result of its own policy choices, taken autonomously—such as abandoning nuclear power and, more recently, scaling back investment in renewables, notably by slowing authorisation procedures for new plants. Italy’s greater dependence on energy imports can hardly be considered an exogenous factor.
Under these conditions, it is difficult to see other member states agreeing to provide Italy with grants, as they did under Next Generation EU. This is not only a matter of fairness, but also reflects the limited success of Italy’s National Recovery and Resilience Plan in delivering sustained growth.
What remains is the loan component. The Union could issue its own debt and then lend the proceeds to Italy. This would effectively constitute Italian debt—albeit potentially at more favourable rates—adding to a public debt burden that is already expected to increase in the coming years, and which financial markets are once again scrutinising closely.
Moreover, issuing common debt would require an increase in member states’ contributions to the EU budget, including from Italy itself.
In short, it makes little sense to appeal to Europe for assistance when the purse strings ultimately remain in the hands of the member states themselves.
A second option would be to revise the Stability and Growth Pact, which constrains national budgets—perhaps by invoking the “exceptional circumstances” clause or by interpreting the rules more flexibly.
This proposal, however, is not—at least for now—supported by other countries, not even Southern ones such as Greece and Portugal (both governed by centre-right coalitions), or Spain (led by a centre-left government).
Even if a more flexible interpretation of the rules were agreed, the impact would depend on how individual countries behave. If Italy alone chose to take advantage of that flexibility by increasing its deficit, it would be immediately penalised by financial markets, given the scale of its public debt—the highest in the euro area.
In other words, loosening the Stability Pact has no effect if Italy is the only country to use the additional fiscal space.
This leaves the option of “going it alone”, which presumably means increasing public borrowing in breach of European rules and commitments.
There is a recent precedent worth recalling.
In 2018, the first government led by Giuseppe Conte—the so-called “yellow-green” coalition—presented a budget that did not comply with the European recommendation to reduce the 2019 deficit below 2 per cent of GDP.
After a protracted negotiation with the European Commission and finance ministers from other countries, Italy revised its deficit target from an initial 2.4 per cent to 2.04 per cent.
In the meantime, the spread between Italian and German interest rates had surged above 300 basis points and remained elevated for much of 2019. It declined only after Italy amended its budget, making it significantly more restrictive than initially planned. In the end, the 2019 public deficit fell to 1.5 per cent of GDP—the lowest level on record.
A government that had initially “banged its fist on the table” in Brussels against rules and austerity was ultimately forced into a U-turn, implementing the most stringent fiscal tightening of the century, with strongly contractionary effects on economic activity.
The lesson is clear: going “it alone” is risky.
Once credibility is lost, regaining it is costly.
A first version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
