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ECB: The gas price ceiling mechanism could jeopardize financial stability

12 December 2022

EU regulations aimed at tempering the increase in natural gas prices could effectively endanger financial stability and must be reconsidered, according to an official opinion of the European Central Bank, Reuters reports.

The controversial mechanism proposed last month foresees capping gas prices for one year when prices at the TTF gas hub exceed the level of 275 euros/Megawatt hour for two consecutive weeks and when TTF prices are higher by 58 euros compared to the world average price of liquefied natural gas during 10 trading days.

The ECB, the guardian of the bloc’s financial stability, admitted that the aim was to moderate high prices and extreme volatility, but warned that the regulations could have the opposite effect.

“The ECB considers that the current project regarding the proposed market correction mechanism could, under some conditions, jeopardize financial stability in the euro area,” says President of the European Central Bank, Christine Lagarde, according to Agerpres.

“The current provisions of the mechanism could increase volatility and margin calls, could hamper the ability of central counterparties to manage financial risks,” says Lagarde.

The ECB also asked the European Commission to reduce its role in the process of activating and finalizing the price-setting mechanism because the current proposal could undermine its independence, while other agencies would be better suited for this role. Instead, the Community Executive should seek advice from the ECB, the opinion states.

At the end of October, the EU leaders asked the Commission to prepare a “temporary” mechanism to cap the gas price, but with the express condition that this mechanism does not disrupt the supply of the continent nor stimulate the consumption of hydrocarbons, two conditions requested by Germany, which is reluctant to any intervention on the market.

Most of the EU member states demand a concrete ceiling imposed on the price of natural gas. On the other side of the table is a small group of EU member countries, but these are powerful countries led by Germany, the first European economy. Along with the Netherlands, Sweden and Finland, this group argues that a price cap would force suppliers to sell their gas elsewhere and also remove incentives to reduce gas consumption.

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