In addition to the short-term effects of rising energy prices, there will be a profound reorganisation of the energy markets and production conditions, believes Fayot (LSAP).
An aid package currently being negotiated by the European Commission will aim to compensate companies for the additional costs of energy through direct aid and the EU Emissions Trading System (ETS). The subsidies framework is expected to be made available within two weeks.
Is this energy crisis comparable to the covid-19 crisis in terms of its impact on businesses?
Franz Fayot: This crisis is perhaps even worse than the covid-19 crisis. The latter was a supply and demand shock imposed by the lockdown measures, which were temporary. Here, in the short term, as during the pandemic, it is a question of saving the furniture, of preserving our industrial fabric, of ensuring that our companies survive this bad patch.
But it is also about a sustainable reorganisation of our energy markets. There is talk, by next winter, of a drastic reduction in dependence on Russian gas and oil, which is very strong in Europe. There is talk of decarbonisation, of increasing the production of renewable energy, and of strategic autonomy for certain European industries.
A new world is in the process of being established
So a new world is in the process of being established, a multipolar world, with borders that are going to close in relation to certain regions of the world. Ultimately, we are talking about a fundamental reorganisation of our markets and production conditions, a rethinking of globalisation, with implications that, in the long term, will invite us to rethink our economy in Europe.
On 28 February, at a press conference, you announced aid to businesses, without giving details. Where do things stand now?
We are working with the European Commission to establish a new temporary framework to support the economy. This is based on what we had for covid. It involves putting in place state aid to compensate companies that have additional costs linked, essentially, to energy.
What is the breakdown of this aid system?
The idea is to have, as during the pandemic, direct aid conditional on the proof of certain elements, such as additional costs that exceed a certain range over reference periods. This part concerns all companies, in all sectors.
Many companies are suffering from liquidity problems because they have to refinance or buy energy at much higher costs than before
Another pillar is providing liquidity facilities, either through guarantees or state loans. Many companies are suffering from liquidity problems because they have to refinance or buy energy at much higher costs than before.
And the third part concerns ETS offsets, i.e. the European mechanisms that allow companies to be compensated for the extra cost of emission certificates in order to enable them to remain internationally competitive. This mechanism was already in place between 2016 and 2020, but has expired. It now needs to be renewed. Another aspect under discussion is the possibility of extending the scheme to new industries.
When will this aid be available to companies?
This framework is currently under discussion, it is not yet fixed. But according to the commission, it should be in the next two weeks. It will determine what we will do in Luxembourg. As soon as the framework is there, we will be ready to implement the necessary measures, so it can go quite quickly.
Which companies are most vulnerable to this energy crisis?
First and foremost, the most energy-intensive industries. The price of gas has increased eightfold, so some companies are simply unable to pass on the extra energy costs to the end customer and are no longer able to produce profitably, even though their order lists are full.
There are sectors that are affected by the nature of their activity, such as logistics and road transport. These companies are in a difficult situation because fuel prices have increased enormously.
But a multitude of other companies are affected. The difficulty is that each company is a special case, because it depends on the electricity supply contracts that have been concluded. Some are exposed to the energy price because of their exposure to the spot market. Others have long-term supply contracts that give them better prices. But if they see their contracts expire and they have to enter into new ones, they are very badly affected because prices and supply conditions have become much less favourable.
The difficulty is that each company is a special case, because it depends on the electricity supply contracts that have been concluded.
Companies, especially in the industrial sector, are affected regarding their ability to produce profitably. What is your strategy in relation to this? Support their production by compensating their losses? Or compensate for their inactivity through short-time working, but then face potential product shortages?
Short-time working is a stopgap measure. The idea is obviously not to suggest to companies that they send their staff home if they are fully booked in terms of orders.
The idea is to allow a state intervention that rebalances production conditions at the level of companies--temporarily, because we all hope that this crisis will soon be over--in order to prevent our companies from suffering too much in terms of international competition.
To do this, we need to compensate them for the loss of earnings linked to energy prices, which will rebalance the conditions of production and allow them to amortise the additional energy costs, and then to produce under market conditions.
In addition, we are negotiating at European level not to look only at energy prices, but also to take into account the disruption of supply chains, the increase in the price of raw materials, all these aspects that companies also suffer from.
But isn't compensating for the losses of companies due to the explosion in energy prices--which, as you said, has increased eightfold--a huge amount of money for the state? Do we have any idea what this amount will represent?
No, there is no absolute figure. But it should be pointed out that not all companies are affected. Companies that are mainly active on the Luxembourg market will pass on part of these costs to the final consumer, so there will be an inflationary effect. But it is the companies that export that are affected, and there are not 100,000 of them. In industry, we are talking about forty or so companies.
But, all the same, this represents large amounts of public money again, and this after the massive investments due to the response to the pandemic. How much can the state spend?
All of this does have considerable budgetary costs. Also, one of the obvious consequences of this war is that it will put a brake on the global economic recovery. It will mean less budgetary revenue in all nations, so there is the question of sustainable financing of these various interventions. This is a very good question to which I do not have a direct answer.
Especially as this question arises in a context where investments will have to be enormous: we will have to invest huge sums in decarbonisation, but also in a new resilience to climate calamities. These are therefore challenging times ahead.
From the point of view of companies, in a context that is already difficult, it is not easy to have the prospect of a second instalment within a year.
There is one idea that is not often mentioned, but which is important: that of restraint. When we talk about public spending, we must not forget to call for energy restraint at all levels: drive a little less, optimise carpooling, drive with full rather than half-empty buses. There are many things that can be done that do not cost a lot of money, but that save energy. These are things that were done in the 1970s during the OPEC crisis and may need to be pulled out of the toolbox.
High inflation will probably trigger two index brackets in the same year. Can Luxembourg companies afford this? Is a delay in payment, which has occurred in the past, possible?
The employers' organisations are talking about it. I understand that, from the point of view of companies, in a context that is already difficult, it is not easy to have the prospect of a second instalment within a year. So I understand that they are addressing the subject.
Now, as I have always said, the index is not available. It will have to be discussed at the tripartite, between social partners, calmly. But I can't tell you at all in what direction these discussions will go.
This story was first published in French on . It has been translated and edited for Delano.