Corporate vulnerability and the energy crisis

Energy costs have soared in the EU since summer 2021, linked to the post-pandemic recovery, the disruptive behaviour of Russia as supplier of gas, and the subsequent full-scale invasion of Ukraine by Russia. This energy cost shock has raised challenges for the European corporate sector. Member States have deployed support in various forms. The current support provided by Member States, however, raises concerns about fiscal costs, incentives for achieving climate goals and ensuring a level playing field. This chapter discusses challenges to the corporate sector’s balance sheets. It reviews changes in energy prices paid by corporations and the implications of these changes on production costs. Simulations are carried out to assess differences across sectors in corporations' increased financial vulnerability under a (hypothetical) worst-case scenario in which firms do not adjust final prices. Results indicate that in this scenario, on aggregate, the increase in the share of financially vulnerable firms was similar to that associated with the COVID-19 pandemic, albeit with a different sectoral pattern: energy-intensive manufacturing and service industries were the most affected by high energy prices, with some impact also on food, accommodation, and retail. Available evidence, however, indicates that firms were generally able to charge higher final prices, including in less energy-intensive sectors, thus recouping higher energy costs. Overall, the analysis supports the phasing out of the existing support according to the plans, provided that there are no further energy price spikes, and ensuring that new support measures remain targeted and temporary.