The European Union begins the year facing clouds on the horizon rather than clear skies ahead. Russia’s war in Ukraine, the energy crisis, and rising inflation—already above 10% in November and expected to stay high into 2023 despite tighter ECB policy—point toward a challenging economic path for the bloc throughout the year.
In this twenty-seventh year of integration, the bloc must closely monitor gas developments and move forward with electricity market reform to prevent renewed strain. Soaring prices continue to weigh on household bills, while the EU weighs responses to the U.S. energy policy, including the Biden administration’s subsidy plans to accelerate the energy transition, support Next Generation EU, and reconsider outdated tax rules.
Political talks will be tough, yet consensus remains possible. “Countries have changed a lot recently and have accepted things they would not have agreed to in the past,” notes Gregory Claeys of Bruegel, a leading Brussels think tank.
One focal issue is an energy price cap of 180 euros per megawatt hour. The Twenty-Seven reached a broad agreement on 19 December to shield consumers from extreme spikes seen last August. Hungary opposed it with a few abstentions from the Netherlands and Austria, but the cap is set to take effect in mid-February after long resistance from the Commission and many capitals.
Energy will nonetheless stay among the major challenges in 2023, with prices remaining well above pre-2021 levels. High energy costs have driven inflation and many other European economic difficulties since the Ukraine crisis began. Replacing Russian gas will take years, according to Phillip Lausberg of the Center for European Policy (CEP). He cautions that future winters could be tougher as cheaper alternatives remain scarce.
The urgency for electricity market reform is clear. The Brussels plan, to be discussed ahead of the March European leaders’ summit, centers on setting prices that reflect actual production costs for marginal technologies such as nuclear and renewables, rather than the most expensive energy sources like gas.
Another major debate shaping Europe’s agenda concerns the U.S. Inflation Reduction Act (IRA) and Washington’s investment plan aimed at curbing inflation while promoting energy transitions. A $370 billion stimulus has sparked concerns in Europe about competitiveness and the possibility of corporate departures. Some partners advocate adopting a similar EU measure or establishing a European sovereignty fund, while others warn it could inflame tensions and spark a trade dispute. The commission will present a plan by the end of January, with a first response expected at the leaders’ summit scheduled for 9–10 February.
As Ursula von der Leyen emphasized at the last European Council, the priority is to avoid a scenario where investments flow to the United States at Europe’s expense. She hopes to secure targeted exemptions for European industry, including car manufacturers, if possible.
Berlin and Paris pressed for rapid action two weeks ago. Claeys explains that if Washington cannot soften its stance, Europe may need to pursue its own subsidy framework and adjust state aid rules. Although negotiations continue, Lausberg sees little likelihood that the U.S.IRA’s core discriminatory elements will be revised, calling for a stronger European industrial policy.
recovery funds
Beyond energy and trade, 2023 will be pivotal for implementing the recovery funds that have already disbursed about 136 billion euros. A central question concerns reforming fiscal rules, which were loosened at the pandemic’s start when a general exemption clause was introduced and now expires in 2024.
The European Commission has already launched the debate on revising debt rules, proposing pathways to reduce debt burdens, tailor plans, increase flexibility, and apply smaller but effective penalties.
Claeys notes the reforms were a breakthrough concept, yet the war and energy crisis in Ukraine may curb the time available for deep discussions. European sources say a bill could surface in March, with the discussion taking place in the latter half of 2023 under Spanish leadership for the EU.