In 1940, John Maynard Keynes proposed “How to pay for war” booklet. This is a question Western countries should be asking themselves today. They may be trying to keep themselves out of the fight, but the war still imposes costs on Ukrainian friends — especially energy prices.Gas, electricity and fuel prices soar; traders now warn Diesel ‘systemic shortage’.

In other words, we have paid the price of war. Of course, these costs are insignificant compared to the losses suffered by the Ukrainian people. They are also less painful than innocent Russians and poor countries around the world who are seen by President Vladimir Putin’s mafia regime as a human shield against Western sanctions.

But the price of Ukraine’s Western friends remains real and necessary — including welcoming refugees, addressing looming food shortages, and managing the economic downturn and supply chain gridlock that is sure to unfold. However, energy costs are clearly the most important part.

So, how to pay for war? Posing the question in this way may focus our attention on the answer that we choose, rather than one that passively lets it happen because we underestimate the scale of future tasks.More importantly, making sure we consciously plan how best to pay for (our part of) the war also makes us more likely to help Ukraine (and ourselves) win the war – because the better we manage The pain of higher energy costs, the easier we find it cut off Oil and gas Income to fund Russian war crimes.

While Western leaders don’t describe them as paying for the war, sky-high energy prices are clearly their top priority.Spanish Prime Minister Pedro Sanchez is leading a campaign Decoupling electricity price Gas price levels in the EU.Belgian Prime Minister Alexander De Creux natural gas price cap. This question will be Today’s European Council Summit – although maybe not big enough. The illusion that only Ukraine is in a state of war hinders the preparation of EU countries to put their economies in a state of war.

Once we accept that austerity in energy and other commodities is bound to make the economy as a whole poorer, like other costs of war, we can distinguish three main ways of distributing the burden. The first is inflation: just let prices go up, run for your life. The second is to take the burden of fiscal balance sheets through government borrowing and the sequential payment of subsidies through tax increases. The third is price control.

World War I and its aftermath paid a price in many countries in the first way: inflation. World War II was paid for by the second and the third: the huge national debt of course, but also the price management and the rationing that came with it. Inflation is largely contained by forced saving. It’s important to understand Keynes’s arguments about how this suppression would have happened in Britain’s WWII effort – not just by legally driving down prices (and rationing in the face of the resulting excess demand) , but because massive public borrowing transfers private purchasing power to private housing.

European countries have mastered the combination of all these. Inflation in commodity and energy prices, initially driven by an uneven post-pandemic recovery in the U.S. but exacerbated by the war, is now spreading to most other prices. Governments have provided a package of support for energy consumers – with Chancellor Rishi Sunak doubling it to £1bn in a spring statement on Wednesday. But they have also taken steps to lower prices – Sunak cut fuel taxes, and the aforementioned example shows that some EU countries have introduced policies of greater price controls.

The risk today is that politicians are too tempted by third parties because they worry too much about public finances. The short-term political benefits of capping energy prices are clear: it pleases all energy buyers and puts the cost on the government instead of the government. But it’s a terrible idea. If the cause of high prices is ultimately insufficient supply to meet expected demand, capping prices will only make the problem worse, hampering supply-driven and demand-reducing efforts. It also means that price regulation by itself ultimately cannot work without some form of rationing and coercion to increase efficiency.

This is especially important in the European Union, which prior to the war revolved much of its policy around its ambitions for a carbon-free economy. In this context, high energy prices – driven by high prices for natural gas and other fossil fuels – are tools to help accelerate the green transition, by increasing the expansion of carbon-free electricity supply, saving energy demand and using energy more efficiently .

Everyone understands that it is also in Europe’s geostrategic interest to move away from fossil fuels. Clearly, however, many leaders see a political advantage in weakening the incentive to do so. The inconvenient fact is that capping prices, even if only by lowering energy taxes, delays the efficiency drive and drives investment decisions away from non-carbon energy sources, rather than allowing markets to work as they currently do.recent Paper An explanation from EU national energy regulators explains this well.

Instead, the government must grit its teeth on option two, albeit by far the most costly option to public finances.This means letting energy price Balance supply and demand, but substantially increase financial support for the hardest hit and investments. The correct model is to pay energy subsidies to households and small businesses independent of their actual use, but to pay the cost of a prescribed minimum level of consumption above the “normal” price. Part of it could come from carbon taxes and energy taxes — carbon dividend A good model here – but can also be borrowed.

Properly designed, this brings the best of all worlds: price signals to accelerate the energy transition, shifting costs to those who can afford it most, and a modest form of indirect energy rationing to ensure the strongest demand is provided. People will be able to continue to consume moderate amounts of energy at no higher cost than before, and will be rewarded for finding ways to further conserve energy consumption.

Keynes emphasized that the cost of war should be managed so that the goal of greater equality should be achieved sooner rather than later. Today, so too is the goal of a equitable transition to a carbon-free economy. But more immediately, public finances should not be seen as an obstacle to doing the right thing in the conflict with Putin-led Russia. As Keynes said in 1940, the same holds true today: “Victory may depend on our being able to demonstrate that we can so organize our economic power as to keep indefinitely driving an unrepentant enemy from the ground. out of the world business and society.”

other readings

• Everything you need to know about budget shortfalls in the UK Spring Statement.

• Is China Helping Russia? Protect its foreign exchange reserves from sanctions?

• Andriy Kobolyev, former CEO of Ukrainian state-owned gas company Naftogaz, explains how Europe can Enforce energy sanctions About Russia.

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