Shocking Economic Reasoning from Angela Merkel

I’m generally, if not always an outright fan of Angela Merkel, at least sympathetic to her policy aims or, at the very least sympathetic to the domestic political constraints under which she operates (even if the result is unappealing policy results – see the “banking union“). But this is just shockingly bad.* From a Spiegel article in mid-December:

She said she would fight an EU probe announced on Wednesday into exemptions from a green energy surcharge for some 2,000 German companies. The European Commission is examining whether the exemptions, totalling some €5 billion and granted to heavy energy users like the steel industry, were unfair and should be repaid.

The German government would not tolerate a weakening of German industry or job losses, she said. “Germany wants to remain a strong industrial location, we need competitive companies,” she said. “This is about companies and when it’s about companies, it’s about jobs.”

She said Germany’s new Economy and Energy Minister, Social Democrat Sigmar Gabriel, would make this very clear to the European Commission. “As long as there are countries in Europe where electricity is cheaper for industry than it is in Germany, I cannot see how we are distorting competition.”

Is your mind boggling as much as mine did upon reading this? What a ridiculous assertion. She can’t actually believe it, right?** Even within the common market there “should” (assuming no distortionary regulation, favorable tax regimes, subsidies, etc, which of course is not at all the operative reality) almost certainly be regional, if not national, differences in electricity prices. Do you live in a mountainous area next to a hydro plant, or in France, and a brie wheel’s throw from a nuclear power plant? Probably your electricity will be fairly cheap. On the other hand, if you’re in Lapland, millions of miles from the nearest power station, probably your electricity will be, by comparison, much more expensive.

It’s not clear that she intended it this way (I doubt she did), but read differently, Merkel’s comment does illuminate the more general silliness of the EU’s approach to internal free trade and subsidies. It is ridiculous to suggest that the existence of electricity price differentials within the EU means that until they disappear any intervention in electricity markets is prima facie non-distortionary. But once the door has been opened to substantial market regulation (which, in the case of electricity production, makes perfect sense) and differing national regimes for executing that regulation, there’s no obvious reason why these German exemptions should be considered any more or less fair, at least on the basis of price, than the regulatory quirks of any other national regulatory regime. If the exemptions are problematic it’s due to the deleterious environmental effects they precipitate, or because the green energy surcharge regulation was written in such a way that they’re actually tangibly illegal.***

*Yes, and also quite old. Oops
**Of course, politicians pander, and this should be about as surprising the David Cameron anti-immigration nonsense we slammed earlier
***The problem here is that since the environmental goals are effected via pricing, the world in which the heavy energy users are exempted from the surcharges is indistinguishable from one in which they pay it and the German government just finds other regulatory levers it can pull to lower the costs elsewhere by an equivalent amount