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The emerging patterns of the energy crisis and the EU’s Recovery Facility

Regional Report

The emerging patterns of the energy crisis and the EU’s Recovery Facility

By June 2022 the examined countries have brought the fifth wave of the Covid-19 pandemic under control, and the late-summer, autumn resurgence of the virus has followed a markedly different trend than before. While this would provide the opportunity to discuss the post-Covid state of municipalities in the region, we cannot talk about a post-crisis state, as both the Russian invasion of Ukraine and the ensuing energy crisis heavily impacts these countries. While national governments have remained centre-stage with regards to crisis management, municipalities and local communities are still directly affected by the crisis. The nature of the challenge is different, as instead of increased crisis management tasks, the issue is first and foremost financial. Rising energy prices and inflationary pressures on wages force municipalities in each of these countries to prepare for multiple scenarios. Some municipalities plan to save money with reduced street lighting, lowered temperature in public institutions, reduced operating hours of public facilities or even by entirely closing down public services, such as libraries, or public swimming pools, or by cutting subsidies to volunteer groups.  Municipalities tend to procure their energy supply on a yearly basis, which means that the full scope of their plight is just unfolding with procurements for 2023 still ongoing.  All four countries have some form of energy price cap in place and policies primarily benefiting households, but the national governments so far had a cautious approach to compensating struggling municipalities. Romania allocated funds in its Reserve Fund and Poland pledged 13.7 billion PLN for local governments, but critics in both cases say that the amount of funds announced so far cannot cover all the energy needs of municipalities at current prices. In the Czech Republic the government has been discussing the issue with the Union of Towns and Municipalities, where the union requested that the government should guarantee the energy supply. In Hungary, the government negotiated individually with each municipality about compensation in 2023 and tabled a proposal in the first days of January 2023, compensating 170 cities of over 10,000 inhabitants with an overall sum of HUF 44 billion (EUR 110 million), which means a 20-euro compensation per capita on average. The proposal is visibly informed by partisan interests, as opposition-led cities receive more than 40% less compensation per capita on average than government-aligned municipalities and with several prominent opposition-led cities being left without any compensation (such as Hódmezővásárhely, the city of opposition candidate for Prime Minister, mayor Péter Márki-Zay). Providing for the energy supply of cities might not be enough in either of these countries if earmarked transfers are not linked to inflation, as wages remain one of the most significant expenses of municipalities – and the inability to raise wages for teachers, nurses, administrators will have a different, but equally troubling outcome as not being able to pay the overhead costs. 

We are still at the initial stage of the energy crisis, but the patterns largely seem to follow the Covid-19 crisis in terms of the interactions between the central and local level. In Czechia, actors are involved in a collective bargaining process, as opposed to Romania, where the set-up might incentivise local governments to engage in individual lobbying. The PiS government in Poland continued its centralisation efforts on the energy market, expects a 10% electricity saving from public administration and placed additional burden on regional and local governments through funding obligations for Ukrainian refugees and for households with coal-based heating. Additionally, the government provides centrally allocated compensation, increasing the financial leverage of the central over the local level. In Hungary, municipalities were explicitly punished by being removed from the overhead cost-reduction programme during the summer, thereby increasing their energy costs 10 or 20-times over from one day to the next. The Hungarian government has also found an additional petty way to increase the financial burdens of municipalities: they have closed down many post offices (operating from state budget) blaming the rising energy costs, and when municipalities demand that citizens need the postal services, then post offices may reopen – with financial assistance from the municipalities themselves. In both Poland and Hungary municipalities are exposed to a centralised (non-competitive) energy market, where the largest, state-owned energy suppliers would have the chance to alleviate the burdens of local governments, but do not take such initiative without government decision. This may result in non-transparent pricing decisions, where opposition-led municipalities have no bargaining leverage and no access to independent oversight or correction mechanism. In the end, the Hungarian government only took action in January 2023 to bail out municipalities with the aforementioned compensation scheme for cities and by announcing that some public institutions may revert back to procuring natural gas at a fixed price. The measure alleviates some of the risks for municipalities, but it comes late and only covers half the year from March to September, mostly outside of the heating season. 

A different indicator of the state of local governance may be the involvement of local actors in the development of the national recovery and resilience plans (NRRPs, developed in order to access funding from the European Recovery and Resilience Fund) as well as the way funds are/will be disbursed. Hungary’s recovery plan has just been endorsed by the European Commission (and the Council) at the end of 2022, but it is known that local governments have not been properly consulted in the drafting process. In Czechia and Poland after an initial phase of drafting lacking consultation, concerted pressure from local actors achieved successful participation in the process and a local influence over the content. This was considered especially a turnaround in Poland, with local contributions making significant changes to NRRP. In Romania, the process was less politicised, however municipalities could contribute to the planning, but their contributions are not specified and proposed measures are territorially not particularly targeted. 

While all four NRRPs are adopted, as of January 2023 Poland and Hungary have not yet received payments from the EU due to concerns over the state of rule of law. Both countries have to fulfil so-called supermilestones in order to access the RRF funds. This puts municipalities in difficult positions, as they badly need the recovery funds for investments, but it is also in their interest for their respective governments to adhere to the EU’s common values and principles. Budapest Mayor Gergely Karácsony for example attempted to exert pressure on the government to commit to reforms at the same time as lobbying in Brussels for Hungary to receive the EU funds. But while in Hungary at least some settlements have already received advance payments from the central budget under the RRF scheme, in Poland, municipal officials warn the central government that more than a thousand investment projects are halted until the arrival of EU funding. The municipalities call on President Duda in their letter to take immediate action so that the country complies with the EU’s expectations and accesses the funds for the sake of Polish citizens. 

An interesting episode in Hungary highlights the complex terrain of structural pressures which municipalities have to navigate. Károly Szita, mayor of Kaposvár and member of Fidesz sent a letter to the President of the European Commission at the end of September 2022, blaming failed “Brussels-sanctions” for high energy prices and calling on the Commission to accept Hungary’s recovery plan, as municipalities are in dire need of additional funding. In a fairly unprecedented collective action, more than 80% of Hungarian municipalities signed the letter (even if only after it was already sent to Von der Leyen). The message fits very well with the government’s narrative of shifting the blame to “Brussels”, while showing widespread support for the recovery plan in an attempt to substitute the effective public consultation process the Commission expects in EU programming. With many opposition-led municipalities having joined such a political call, it would be fair to say that local level autonomy is not the primary concern for the majority of municipalities. The episode also exemplifies power relations, as several cities have recounted informal pressure from government actors to sign the letter. On the other hand, the disbursement of EU funds would in fact create more room to manoeuvre for local governments drained of funds after the past two years. As such, one potential interpretation of the case would be that the vast majority of Hungarian municipalities have chosen a chance for more financial autonomy over perceived political independence – or to put it otherwise: expended political capital for the promise of financial gains.