Germany will borrow nearly $200 billion to cap consumers' energy bills

London(CNN Business) The German government announced plans to borrow €200 billion ($195 billion) to cap natural gas prices for households and businesses. That's a bigger price tag than the £150 billion ($165 billion) the UK government is expected to borrow to finance its own price cap.

Germany, Europe's biggest economy, is trying to cope with surging gas and electricity costs caused largely by a collapse in Russian gas supplies to Europe. Moscow has blamed these supply issues on the Western sanctions that followed its invasion of Ukraine in February.

"Prices have to come down, so the government will do everything it can. To this end, we are setting up a large defensive shield," said German Chancellor Olaf Scholz on Thursday.

Under the plans, which are set to run until spring 2024, the government will introduce an emergency price brake on gas, the details of which will be announced next month. It is also scrapping a planned gas levy meant to help firms struggling with high spot market prices.

A temporary electricity price brake will subsidize basic consumption for consumers and small and medium-sized companies.

Sales tax on gas will fall sharply to 7% from 19%.

The package will be financed with new borrowing this year, as Berlin makes use of the suspension of a constitutionally enshrined limit on new debt of 0.35% of gross domestic product.

Finance Minister Christian Lindner has said he wants to comply with the limit again next year.

Lindner, of the pro-business Free Democrats (FDP) who share power with Scholz's Social Democrats and the Greens, said on Thursday the country's public finances were stable.

"We can put it no other way: We find ourselves in an energy war," said Lindner. "We want to clearly separate crisis expenditure from our regular budget management. We want to send a very clear signal to the capital markets."

Record inflation

Lindner also said the steps would act as a brake on inflation, which has hit its highest level in more than a quarter century.

Consumer prices rose 10.9% in the year through September, provisional data from the country's statistics office showed on Thursday.

Germany has historically relied on Russian natural gas exports to fuel its homes and heavy industry. But a sharp drop in Moscow's gas shipments since the start of the war has pushed some of Germany's manufacturers to the brink.

"The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump in the German economy," Torsten Schmidt, head of economic research at RWI - Leibniz Institute for Economic Research, said in a Thursday report coauthored with three other top German economic institutes.

While German GDP is expected to rise by 1.4% this year, it is likely to fall by 0.4% in 2023, the report predicts.

The report said that, while tight gas supplies should ease over the medium-term, prices are likely to remain "well above pre-crisis levels."

"This will mean a permanent loss of prosperity for Germany," it said.

Industry groups welcomed the government's plans.

"This is important relief," said Wolfgang Grosse Entrup, head of the chemicals industry trade group VCI. "Now we need details quickly, as firms increasingly have their backs to the wall."