"From 'Dress Warmly' to 'Financial Support'... Why 'Bailouts' Have Become Easier in Europe"

[Image source=Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] "This winter, we might need to dress a bit warmer."

West Germany's Chancellor Willy Brandt said this to the public ahead of the winter during the 1973-1974 oil crisis when energy prices surged. He emphasized that although they would have to endure two or three more winters like this, they would not starve. The West German government reduced oil consumption through measures such as speed limits on cars and banning driving on Sundays. Sweden and the Netherlands implemented oil rationing, while Italy imposed curfews on restaurants and bars.

On the 25th (local time), The Economist compared the current energy crisis Europe is facing with the government responses during the energy crisis in the 1970s, 50 years ago, highlighting significant differences. The Economist said, "Imagine today's national leaders approaching the situation like Brandt, telling people to wear more clothes," adding, "When industries, companies, and citizens face hardships, government financial support is not far behind. Profits are privatized, but actual or potential losses are socialized."

The Economist made this comparison because European governments have recently been pouring out financial support in response to the sharp rise in energy prices. According to reports, the UK government recently announced it would provide support equivalent to 6.5% of GDP next year to reduce energy burdens on households and businesses. Germany and France also decided to provide subsidies equivalent to 3% of GDP each. The Economist described this as entering "the era of bail-outs for everyone."

The Economist analyzed three reasons why national responses in the form of bailouts have emerged over the same issue of soaring energy prices in the past 50 years. First, the global financial crisis of 2007-2009 justified government intervention. At that time, the US injected funds into banks and mortgage lenders amounting to about 3.5% of GDP. The Economist explained, "The logic for government intervention was that if the banking system collapses, the rest of the economy collapses, and doing nothing would cost more."

The other two reasons cited were the COVID-19 pandemic and Russia's invasion of Ukraine. When the sudden COVID-19 outbreak in early 2020 made lockdowns inevitable worldwide, concerns about economic recession spread, and governments responded with monetary easing to address it. Then, when energy prices surged in Europe following Russia's invasion of Ukraine last February, politicians were convinced there was no choice but government intervention, The Economist reported. According to Goldman Sachs, Europe's energy cost burden is expected to increase by about 2 trillion euros (approximately 2800 trillion won) compared to last year.

The Economist stated that to understand the current role of the state, one must abandon the previous neoliberal idea of leaving markets alone, explaining, "After three consecutive crises over a generation, the standards of political debate have changed. Politicians have now set new expectations for what governments can and must do." The Economist added that financial support measures are pouring out worldwide, including student loan support in the US and living cost subsidies in Australia and New Zealand.