We would not be the first to reach a price cap, says economist Hradil. He warns against political abuse

There is a real risk that we will create a second item that we will never be able to get rid of. We have put a tool in the hands of politicians for determining the price of energy, in an interview with the daily FORUM 24, chief economist of Cyrrus Vít Hradil explains the reason why he considers capping energy prices dangerous. According to him, several solutions were offered.

Do you think price capping is the right move by the government?

It has two levels. One is political and social. It was evident that there was a huge demand for a simple quick fix and this was being pushed from the political opposition. We’ve already had demonstrations here where it sounded. The demand was so enormous that it could even be tolerated, if the solution is not completely economically happy in the end, but prevents further social tension. So, from that point of view, I kind of understand that the government basically capitulated in the end and came up with what the people wanted. On the other hand, if we look at it economically, the solution is simply not good, I would even say that it is potentially very dangerous.

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Several solutions were offered. It was always a choice between the solution being simple and administratively easy but economically bad, which is what the government ultimately chose, or there were less popular alternatives that were administratively more difficult but economically made much more sense. So in the end I think the political factor prevailed there and we got what we got.

What are the alternative solutions?

If we want to talk about price ceilings, something like the Austrian model is offered. This means that you cap the prices so that people have to pay for it, but at the same time you add a clear condition that energy savings need to be achieved. The reality is that energy in Europe is and will be scarce in the near future. Some of those who used them last year will not use them much this year. Pretending that we all have them available all the time at prices that are affordable for everyone is hiding from reality. Of course, it can happen that there is a household that is unable to achieve savings for objective reasons and would suffer terribly. Then you can get targeted help there.

The other way, which I still unfortunately think, even though it’s terribly unpopular with people right now, is much happier, is to leave the prices in the market. As the market puts pressure on the price, those who don’t need energy so badly will gradually give up consumption, leaving only those who can’t do without it. So the market itself will decide who needs energy the most.

This of course creates social problems, because households, schools or hospitals simply have to pay, even if the price is astronomical. There, the government’s role is much simpler. It should single out such people or institutions and send them absolutely targeted financial support, so that they do not get into existential problems, but it simply should not reach out to the market as an allocation organism that determines where energy should and should not go.

This is also related to the fact that roofing applies to everyone, including wealthier households.

Of course, that’s one of the minor issues I have with it. In discussions, the first person always imagines a single woman or a pensioner who does not have heating for the poor man. Of course, such people exist and need help. But this solution is not only aimed at them, so part of the money will go to absolute nonsense, that means the famous heating of swimming pools, billionaires… the money will clearly go there too. But I say, I would easily forgive the government as part of some simplification. That there will be some waste is unfortunate, of course, because in the end, and for some reason people are often unable to realize this, the taxpayer ends up paying for that money. They, those who called for help, or their children will pay for it, including paying the billionaires to heat the pool.

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But what I think is the biggest risk politically, and I’m honestly afraid it will come true, is that we’ve put a tool in the hands of politicians to determine the price of energy. It will affect basically everyone at any stage of their life even in 10 years, 15 years. It is such an explosive political tool that it lends itself to political abuse. You set the ceiling at six crowns, the first opposition party will say that it should have been three crowns, the second that it should have been two, and so on. There is no defense against it. Politically you can always say “why don’t you want to help our people, people want lower energy prices”. It will always have some response and support. I’m scared of where this could go. The moment the mechanism exists and has been used, you have opened Pandora’s box and hope that someone will be able to close it someday.

Frankly speaking, there will be enormous pressure from absolutely everyone against a politician in the Czech Republic in two years who will have to end this support because it is conceived as temporary. Who in the Czech Republic will behave like Churchill and say that it was a temporary crisis measure and that the crisis has passed? Who can say that and hold against that pressure? With all due respect to our politicians today, I can’t imagine who it could be.

So, according to you, it is a solution to the current problem, which, however, brings a number of risks in the long run.

Currently, as I said, it is one of the worse solutions, it could have been done better. If in the end it really turns out the way it is presented, that means it will take two years, the ceilings will remain as they are and no one will change it anymore, so even the economist will close their eyes and say good. In the framework of social peace, we made an inappropriate solution, but at least some.

But several tens of billions are being burned senselessly there. There is a real threat of blackouts. If we pretend in Europe that energy is relatively cheaper than the market thinks, then we are ignoring its signal. Energy is not realistic and it can happen that they run out at the last moment. Because everyone wants to consume them for the cheaper price and there really isn’t that much energy here, so blackouts can occur. But the short-term risks are just inconveniences, the long-term risks scare me.

Pensions are a similar item. It’s a similar principle. This is a vulnerable group of people and it is completely left to the politicians. Pensions are gigantic politics. Before every election, we compete to add more. There is a real risk that we will create a second item that we will never be able to get rid of.

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The ceiling should be visible already in November. How will it affect people who have been fixed?

My understanding is that those who are fixed below the ceiling price will not be affected in any way and will continue to have their better price. For all those who have fixed above the ceiling price, the supplier will reduce the price to the ceiling. But the contractor will continue to insist on the money he received before, so the rest will be matched by the state. By the way, this is another curious moment of the entire program. If someone in extreme cases, be it a household or a company, were to fully consciously speculate on the market price and decide not to fix at any moment, play roulette and hope that the price will go down, then of course they would lose because the price shot up. And now his gambeling will be paid for by his fellow citizens. These are extreme cases, but 100% such people and companies are, more often companies than people, and we saved them the gambel that didn’t work out.

Does the state have the ability to sustain the capped prices for two years?

It has. There are of course risks, and if the market takes a turn for the worse, costs will rise. That’s one thing. Second, I think it will end up being a bit more expensive than the government announced. At the same time, it is interesting that no one is able to predict how energy suppliers will behave. An absolutely bizarre situation arose. Suppliers normally compete with each other for customers and try to secure a better price. If the price is capped, it loses its meaning and the supplier has no reason to try for a better price. He knows he will get the difference made up, so he is motivated to play accounting tricks to convince the government that it is costing him more because she is supplying him with the difference. It will need to be controlled in some way, and the control will never be perfect.

For another, competition between suppliers is absolutely meaningless and gives no reason. Why would a supplier on the market try to get the best price when the state will pay for it. If the government doesn’t anticipate that this is likely to happen, it makes the program more expensive because it will deliver more.

I think that even in the worst case, the two years will cost between 100 and 200 billion, which is a gigantic number, but it will not collapse the state, nor will it threaten it in the long term. I mean directly the costs from the budget even after the planned higher incomes are deducted. There is an extraordinary tax, a dividend from ČEZ and others.

In the long run, it will endanger the state if it becomes a political and civil instrument that we will argue about every year. And by the way, these cases exist. There is the example of Lebanon, which ended up in state bankruptcy in a similar way. Same scenario. Capping, fixing prices, then there was no will to cancel it and it ends with the state doing almost nothing else than trying to borrow energy for the promised ceilings. So we wouldn’t be the first to figure it out.

The article is in Czech

Tags: reach price cap economist Hradil warns political abuse

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