Abandoning State Interventionism Requires Braver Politicians

As hinted last week in statements from ministers, the Government halved the subsidies for gas and electricity prices for citizens on Tuesday. The specific calculation presented shows that from November 1, citizens will pay seven percent more for electricity and 9.5 percent more for gas consumption over the course of a year. However, if you ask the Government, this does not mean that we are facing an additional increase in inflation, which, at 4.1 percent in August, is already among the highest in the Eurozone.

Moreover, Minister of Economy Ante Šušnjar coldly stated in an interview with RTL last week that the reduction in subsidies will act – anti-inflationary.

That Šušnjar’s expectations are, to say the least, (overly) optimistic was shown by the autumn macroeconomic forecasts of the Croatian National Bank (HNB), published just a few days later. They indicate that inflation this year could be slightly higher compared to 2024, with the rate measured by the harmonized index of consumer prices (HICP) accelerating to 4.2 percent, up from last year’s four percent. The reason: rising energy and, of course, food prices.

However, state price regulation cannot and should not last forever. Moreover, market prices for electricity and gas are not far from the current regulated ones, so even a complete abolition of subsidies would not bring about the kind of inflation shock seen in 2022, which at one point was even double-digit. This is also demonstrated by the example of fuel prices. Today, one liter of Euro-super costs 1.46 euros, a not particularly painful 3.5 percent more than before the July decision to lift price caps on derivatives.

This once again raises the question of the sensibility of state interventionism and its effects, especially when the state intervenes so broadly.

Employers gathered in their association recently reiterated that it is wiser for the state to fully cover the energy costs for the most socially vulnerable instead of providing everyone with a slightly lower price, including the wealthiest.

As highlighted by the CEO Irena Weber at HUP’s ‘Economic Coffee’, ‘interventions are necessary in crises, but they must not become a permanent state’. That one should not fear leaving economic forces to the famous ‘invisible hand of the market’ is excellently demonstrated by the example of Argentina.

Some observers, including the undersigned, believed that the beleaguered Argentine economy least needed the radical libertarian policies of deregulation and austerity promised by President Javier Milei. However, nearly two years later, the Argentine economy is growing at a rate above five percent, breaking a 15-year period of stagnation.

Inflation, which was in triple digits in November 2023, before Milei’s electoral victory, has fallen to 24 percent, and next year it is expected to slow to 10 percent. Argentina is also expecting a budget surplus next year, in contrast to the previous deficit of five percent of GDP.

However, such results can only come after the moves of a brave statesman, not calculating politicians whose purpose of existence is to avoid displeasing voters in order to win another term. This is not only true for Croatia; it is the case in most European countries. After all, state regulation is slowly becoming the main European product.