Britain and France are longtime allies with remarkably similar economies. Yet the two countries share a false perception that their own economic policy is miles – or miles away – from that on the other side of the Channel.
In the current energy crisis, however, the response of the French and British governments could not have been more different. The government of globalist President Emmanuel Macron has opted for a populist strategy, while Boris Johnson has opted for the economic playbook recommended by the IMF.
Both countries are facing the same shock – that of wholesale gas prices being about 10 times higher than normal levels. France is helped by a large nuclear sector, which normally provides 70% of its electricity production, but much less currently with half of its reactors shut down. The UK has the advantage of its gas reserves in the North Sea, which supplied around 40% of consumption last year. Overall, net gas imports into the UK are similar to those into France.
In Paris, the response to the energy crisis has been a concerted attempt to find a big carpet at the Élysée Palace and sweep all the problems below. The Macron government’s so-called “price shield” policy capped electricity price increases at 4% this year and froze household gas prices. To protect consumers, public finances must bear the cost of rising wholesale prices.
In Downing Street, by contrast, the UK government has so far chosen the grown-up option of exposing the problem and resolving it transparently. Increases in wholesale energy prices are passed on to consumers, although with some lag suppliers are not bailed out and every household has received a huge incentive to save energy.
To help households, the government has introduced a £37billion package of targeted support for the elderly and poorest with lump sum payments for all to help pay for higher energy costs. Fittingly, a small part of this package was funded by a windfall tax on companies making surprisingly large profits from their operations in the North Sea.
Although the UK package is complicated, messy and leads to much higher inflation, it comes quite close to the IMF’s recommendation that countries should allow prices to rise and compensate vulnerable energy users for their losses. Overall, this is cheaper than a general price cap, while being transparent and providing the right incentives.
The problem is that while economists tend to like the British solution, the public hates it. The government has received virtually no credit for the support it has offered so far and the national conversation has centered on rising bills rather than ongoing aid.
The truth is that both countries must now learn from each other. Retail energy prices have already risen so much in the UK that households no longer need any additional reason to reduce consumption – the energy savings will happen anyway. Targeting households for income support also has its limitations as it provides far too much assistance for those living in small, energy-efficient houses and too little for those living in old, drafty houses ( often through no fault of their own). A kind of French-style public discount on invoices, temporary but substantial, is now necessary.
However, in France, public finances are far too exposed to wholesale energy prices. Too much of the burden is placed on future generations rather than current consumers, who face little additional pressure to limit their gas and electricity consumption. Retail prices are set to increase further with additional support offered to vulnerable people.
Both governments will find it difficult to leave their current positions to provide energy support. As difficult as it is for Macron and the next British Prime Minister to look across the waters and learn from them, part of the solution to their energy problems lies across the Channel.
. For solutions crisis energy look at across the Channel