Europe: Non-Competitive Power Prices Derail Growth

Despite an endless chain of monetary and fiscal stimuli, the Eurozone consistently disappoints in growth and job creation. One of the reasons is demographics. No monetary and public spending stimulus can offset the impact on consumption and economic growth of an ageing population, as Japan can also confirm.

However, there is an especially important factor that tends to be overlooked. The lack of competitiveness of the Eurozone industry due to rising and non-competitive power prices.

Residential electricity prices in the European Union between 2010 and 2014 averaged near $240/MWh, whereas the U.S. averaged nearly $120/MWh or less than half of EU prices. Gasoline and gasoil prices were also twice as expensive in the average of the European Union compared with the United States (source).

This trend has not improved. In 2020, the average residential consumer’s electricity price in Europe showed an increase of 13% over the average price ten years before.

Renewable subsidies play an important role. In Germany, household power prices have risen dramatically since 2006. Household electricity have increased by 57% between 2006 and 2019 while the country invested more than 150 billion euros in subsidies for renewables. The price of energy only accounts for 23% of the average household bill, while renewable premiums account for 21% and the cost of the networks 24%. Today, Germany depends in almost 24% of its energy mix on coal and 12% on natural gas.

Taxes and levies make the biggest difference. Their share climbed steadily, from 25.6% in 2011 to 40,3% in 2020, with rates as high as 66% in Denmark and 53% in Germany.

The Added Value Tax (VAT) average in the EU is 15.5 % of the total price and ranges from 4.8 % in Malta to 21.2 % in Hungary.

These high energy prices were businesses and households face massive taxes and fixed costs, work as a burden on growth and competitiveness. Even in Germany, where exporter industries are exempt from renewable levies, the difference with the United States and China in terms of energy costs remains too high and makes most industries lose competitiveness. We must remember that energy costs can account for up to 30% of all costs for industry. Rising fixed costs in the energy bill means a working capital burden for businesses that inevitably leads to reduced job creation as the two most important costs are energy and labor in industrial manufacturers.

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