A European energy union is increasingly on the agenda, as tensions with Russia rise and the EU is confronted with its energy dependence on Russian gas. But replicating the model of the banking union is a naive approach, Ivana Jemelkova and Hans Hack write.
Ivana Jemelkova is director at FTI Consulting in Brussels, Hans Hack is the head of Financial Services at FTI.
The post-war shock enabled the creation of a European coal and steel community; a banking union rose from the financial crisis. Could the escalating situation in Ukraine provide momentum for the emergence of a new energy integration project, which – similarly to its predecessors – would fundamentally change the regulatory landscape and the way governments and businesses operate in Europe?
When introducing the proposal for a European energy union earlier this year, Polish PM Tusk drew parallels with the recently agreed banking union: a single European body (supervisory or purchasing), a single resolution mechanism (a joint external representation as the energy equivalent) and a solidarity-based system underpinned by a common fund (in energy: EU-funded infrastructure build-up). He proposed an intellectually provocative idea of an integration project building on models in other sectors. And despite initial reservations by some member states, incoming Commission President Juncker has further championed the concept in his speech to the European Parliament. However, could energy really borrow from the financial sector, “copy & paste” key elements and utilise similar drivers?
The regulatory ecosystem today referred to as the banking union came in reaction to the financial and subsequent sovereign debt crisis. The Eurozone “avant-garde” agreed there was an urgent need for action - continuing the status quo was simply impossible, notably for distressed countries, amid mounting public pressure and a damning link between banks and the financial strength of national governments. The objective was clear - to provide reassurance and confidence to the financial markets and restart lending to troubled economies. However, this was not an easy feat; the form of integration - a combination of the standard regulatory procedure and an intergovernmental agreement - was repeatedly questioned by the European Parliament. In addition, even within supportive member states, the concept of handing over supervision of “their” banks to a European body that is outside of their direct political control, was a difficult hurdle to take. Equally, the new mode of cooperation did not materialise overnight. Negotiations took almost three years to complete and actual implementation of the patchwork of elements is only just starting. Despite its problems, the banking union is seen as fulfilling its original objectives – calming down the markets.
Could something similar work in energy? Whereas the banking union has materialised amid strong concerns on the viability of the Euro itself and therefore financial institutions throughout the Eurozone (including northern member states), the crisis perception in energy does not seem to be strong enough to motivate joint action at this stage. While some Central and Eastern-European leaders - with V4 countries at the forefront – are trying to raise the debate, varied levels of interactions with external economies prevent a more unified approach, as illustrated by recent unilateral national moves. Similarly, while the banking union has been helped by the existence and credibility of the European Central Bank, it remains unclear which body could play a comparable role in energy in the current context.
Another key difference is also pronounced: the ultimate objective. Europe wants more security in energy but is unable to define together what success should look like. It wants more stability but refuses to create a more transparent market by sharing information. It also asks for more diversity but the very term (ironically) seems to mean a different thing in each member state, with regards to both internal and external priorities.
While Tusk’s calls for a true European energy policy are not isolated, his grand design approach is rather distinctive and underpinned by a strong and simple narrative; Europe is coming out of the financial crisis because it said “yes” to closer cooperation (and the ECB promised to do whatever it takes to save the Euro) and similar leadership is now needed in energy. But Europe does not seem to be listening. Why? Some of Tusk’s EU partners buy gas at more than 30% cheaper prices and they are not ready to give up on this competitive advantage.
So while the idea of replicating the banking union model in energy seems academically attractive, until a major event or a radical shift in the political balance breaks the virtuous circle, it does not seem realistic to expect Europe to synergise around a solidarity-based proposal. Unless, of course, another substantial “avant-garde” emerges and creates momentum for others to join, as is the case for the Eurozone countries in the banking union. Today, ten EU member states depend on Russia for more than half of their consumption – they should be most interested in increasing their bargaining power and negotiating package deals as a bloc. And – as in the case of banking union – this could be done on the basis of an intergovernmental agreement to start with. If the holy grail of “one voice” is out of reach, the second best option seems a strong voice of a critical mass of key allies. This may well create the necessary snowball effect leading to significant changes in the energy policy.
In the meantime, although the presence of an external competitor typically fuels cooperation, the aspect of energy dependence is just one of the pieces in the puzzle. Without an ultimate agreement on the internal dimension of the policy – what if most of Europe’s supply need could be covered from home – looking elsewhere is not likely to solve the core problem. And while the political debate continues, the clock is ticking for business. If Europe wants to stimulate growth, it needs to overcome fragmentation and ensure reliable, long-term investment frameworks. While it is hesitating, other geographies are moving to create more attractive environments. EU decision-makers need to reflect these shifts urgently and leverage technological leadership, geographical conditions and global alliances to safeguard Europe’s security in the broadest sense of that word.