Successful management of energy crisis is key to avoiding recession, says EU's Dombrovskis

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Europe's ability to avoid a recession depends on it being able to ride out the current energy crisis, the Vice President of the European Commission and EU Trade Commissioner Valdis Dombrovskis has told Euronews.

Dombrovskis said that although growth in the first half of this year had been unexpectedly strong, a deteriorating environment is sapping confidence.

"What we are seeing actually is that this year, the first half of the year was actually quite strong," he told Shona Murray on The Global Conversation. 

"And if anything, we probably will be revising upwards this year's growth forecast, so from 2.7%, which is our current forecast. But also, we are seeing right now a rapidly deteriorating environment, with confidence indicators going rapidly down. 

"So I would say the economic outlook depends also to a large extent on how we will manage the current energy crisis," he told Euronews.

Dombrovskis said the European Union still has the capacity to help its citizens face up to the energy crisis, citing the unused €225 billion available from the Recovery and Resilience Facility Loans.

Interview In Full

Shona Murray: The EU's announced this week, alongside the G7, a global price cap for Russian oil. But there are worries that this will trigger a rise in oil prices and even more instability. Are you confident that this will have the desired effect to impact on Russian revenue?

Valdis Dombrovskis: So in a sense, with this price cap, if it is implemented at at least the G7 but possibly also a broader level, on one hand, we would deprive Russia of additional revenues, which it could use to further finance its war against Ukraine. On another hand, it also helps to stabilize overall oil prices.

Shona Murray: But I think there's a concern obviously that not everybody is on board outside the G7 and the EU, for example, India, China, and other countries that will perhaps avail of Russian oil and pay the higher price.

Valdis Dombrovskis: In this case, we know that already now Russia is selling its oil to China to India with a significant discount to compare with world prices, probably they will have to sell at an even deeper discount and also will not get so much revenue. So the aim to reduce Russia's ability to finance its war machine is indeed helped by this imposition of the price cap.

Shona Murray: So essentially, it's influential regardless. Will there be a price cap on Russian gas coming into the EU? I mean, we obviously talked about oil there, but the gas?

Valdis Dombrovskis: Well, indeed, as you know, it's something which is very much discussed and from the European Commission side, we have also prepared different ways on how this price cap can actually be implemented. So the discussions on this issue are indeed ongoing. Probably two things to note. One is the volumes of Russian gas coming to the EU are anyway rapidly declining and by now, for example, Norway is the biggest gas supplier to the EU, not Russia. And second, when we are discussing this price cap, it's also important that we treat reliable partners differently from Russia. So, for example, Norway has been doing a lot to increase its gas supplies to the EU at a time when we really needed it.

Shona Murray: So I suppose moving away from sanctions and on to how the EU can act to deal with the energy crisis, we heard from President von der Leyen saying there will be a price cap on gas, likely to be a cap on the trade of gas within Europe. Can you just explain to us how this will work and how it'll affect the price of gas? What can be done for consumers?

Valdis Dombrovskis: There is one discussion on a so-called dynamic price cap, which would follow world gas prices with a certain premium on top of those world gas prices to ensure that there is gas availability to the EU.

Shona Murray: And how far along are the negotiations with reliable partners like Norway on potentially creating some sort of lower price for gas?

Valdis Dombrovskis: Well, of course, we hope to finalize as soon as possible, but since these are negotiations, we cannot now set the deadline, because it also requires another side to agree. But of course, we are keeping in mind that it needs to be done in a very short timeframe because we are addressing the crisis situation.

Shona Murray: I suppose moving on to how EU member states have dealt with it, I mean, how concerned are you about the German decision to unilaterally announce a €200 billion energy plan? Do you think that's a breach of fair competition? But I suppose, moreover, a breach of the solidarity and unity we've seen amongst member states so far.

Valdis Dombrovskis: Well, as regards Germany's announced measures, indeed we've had some discussion on Germany's and also other countries' measures yesterday in ECOFIN. And so the German finance minister Lindner presented the package and also outlined that the support is meant to be there over several years, so it's not all to be used now and many of the measures are still in a process of let's say preparation. So it's still a bit open how exactly they are going to be implemented.

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Shona Murray: We saw the intervention by commissioners Breton and Gentiloni yesterday. Is there something of a split within the commission? I mean, they're calling for more solidarity than you have, I suppose, in contrast to Germany's position.

Valdis Dombrovskis: Well, firstly, there are a number of solidarity mechanisms which are already available. To give you some example, we still have unused €225 billion from the Recovery and Resilience Facility Loans. And actually just yesterday the ECOFIN finance ministers agreed on their position concerning the so-called REPowerEU proposal, which on the one hand would accelerate the use of those €225 billion and puts also an additional €20 billion in grants on the table to address current energy challenges.

Shona Murray: We also said this week that we can no longer exclude a contraction of economic growth. And we've heard similar from the ECB that essentially a recession is on the way. Is that the most likely scenario?

Valdis Dombrovskis: So what we are seeing actually is that this year, the first half of the year was actually quite strong. And if anything, we probably will be revising upwards this year's growth forecast, so from 2.7%, which is our current forecast. But also, we are seeing right now a rapidly deteriorating environment, with confidence indicators going rapidly down. So I would say the economic outlook depends also to a large extent on how we will manage the current energy crisis. So if we manage to ensure sufficient energy supplies, we can avoid this scenario. So a lot will depend on how we will be managing the energy crisis.

Shona Murray: Just before we let you go, Vice President, given what we've just spoken about there, high inflation concerns around energy, more sanctions against Russia. How can the EU ensure that citizens are behind them?

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Valdis Dombrovskis: Well, first of all, indeed, what we are now dealing with are the consequences of Russia's aggression against Ukraine and the decisions which Russia is taking. So the best way to mitigate the consequences of the war is to stop the war, because the faster we can stop the war, the faster we can start recovering from the economic consequences of the war. And from this point of view, it's very important that we continue to provide support to Ukraine, military support, and financial support, following Putin's latest steps in escalating the war.

Shona Murray: Vice President of the European Commission and EU Trade Commissioner Valdis Dombrovskis, thank you very much for joining us on The Global Conversation.