Looking at the data it’s clear why the Greek government is concerned about this:
As the graph shows, in the second half last year, Greek gas prices were the highest in the EU not including taxes and third highest including taxes. This is very problematic for Greece for a few reasons:
- Obviously in the depth of a deep recession very high energy prices can act as a significant drag on the economy (both on supply as it impacts business and consumption as it eats into the spending power of consumers).
- Greece is completely reliant on imports for much of its energy supply, particularly gas and oil. This makes it vulnerable to future price shocks and gives it little control. Incidentally it also makes its current account adjustment (moving to a surplus) more difficult since it has an almost permanent deficit from energy imports.
- Surprisingly, Greece has so far managed to keep fairly low electricity prices. This is positive for consumers but problematic for the producers facing very low margins. Usually, this might be an easy problem to balance out, however, with the government looking privatise the sector it makes investment look much less appealing. Partly in response to this, the government has allowed prices to be pushed up further squeezing the standard of living.
As we noted during the Cypriot crisis, Russian influence in the region (particularly in relation to energy) is a very dicey issue, which brings out conflicting goals in various EU member states.
Natural Gas Europe reported last week that negotiations between Gazprom and Greece have been on-going for some time but are at somewhat of an impasse with the former offering price reductions of around 10% and the latter requesting up to 20%.
Any favour on gas prices from Gazprom (via Putin) is unlikely to come for free. The EU (and the US for that matter) will likely be mindful of ceding further influence over an EU member to Russia, especially one in as strategically important position as Greece. Gazprom has also widely been mooted as the likely buyer of DEPA, the Greek gas monopoly which is being privatised, although it did refrain from bidding earlier this year. Still the prospect for increasing Russian presence in Greece and the Greek energy market is clear, while hope of Greece tapping into 'vast' reserves under the Mediterranean are still a pipe dream to a large extent.
All that said, its clearly early days and we shouldn't get ahead of ourselves. But we’re certain other EU leaders will be watching this one closely.