“If we have a barrel whose price keeps rising, I want to ask our European partners ‘what do we do?” French President Nicolas Sarkozy said in a May interview with French radio RTL.

Sarkozy’s sense of powerlessness against the rise of crude oil prices, which went from just $30 a barrel in 2003 to $137 by early June 2008, is widely shared by leaders across the European Union. They must convince angry truckers and fishermen that while their jobs are at stake, they have to wait for an answer from Brussels. If there’s anything to learn from past oil crises, it’s that it is for the better.

No quick fixes, no inflation

The 1973 and 1979 oil shocks fuelled a Europe-wide crisis defined by high inflation and economic slump. After three decades of prosperity, people were suddenly asked to save on light and heating to help their country recover from the shock.
 
The French government responded with a mix of austerity measures and economy-boosting policies. But with the exception of West Germany, most European countries failed to rein in double-digit inflation and stop unemployment from becoming a mass phenomenon.

“The poor response to the (1970s) oil crisis caused a huge slowdown in economic growth and we paid a very high price for the error,” Jean-Claude Trichet, the head of the European Central Bank (ECB) summed up in an early June interview with the French news website Mediapart.

Out of the 1970s upheavals came a common aspiration for price stability that eventually led to the1998 creation of the ECB. Inflation became the bank’s main focus despite growing criticisms that anti-inflation measures could hurt economic growth.

“Now that there’s a common monetary policy, Trichet keeps interest rates high to fight inflation,” says Jacques Percebois, head of the Research Centre in Energy Law and Economy at the Montpellier University. “It’s his obsession.”

As they converted to monetary orthodoxy, EU members also agreed to the Growth and Stability Pact. After two decades of funding their sluggish growth through budget deficits, they pledged to keep them under control.

Juggling European commitments and crowd-pleasing policies becomes more difficult in a context of record-setting inflation – 3.6% in May 2008.

All this means that three strong levers of public policy are now out of governments’ hands. “They can’t play on monetary policy because it’s not a state competence any more. They need the go-ahead from Brussels to tinker with fiscal policy and they can’t launch into a policy of public work programmes because they need to respect their commitments under the Stability Pact,” Percebois sums up.

The importance of coordinating responses

EU finance ministers met in Frankfurt last week to explore responses to the crisis ahead of the June 19-20 Brussels summit. Despite growing protests by truckers and fishermen, ministers agreed that governments should not cut taxes or commit to big wage rises to compensate for rising costs.

“This is one big difference with the 1970s, when European governments responded to the oil crisis separately,” says Stephen Boucher, co-general secretary of the French think tank Notre Europe.

France’s proposal that VAT on fuel be suspended when oil prices are too high was not well received. The measure, advocated by French President Nicolas Sarkozy, goes against a 2005 agreement to avoid introducing fiscal measures that could have a distorting effect on the oil market.

“Today EU member countries want to remain sovereign on energy and taxation but they have to live by the rules that they themselves called for,” Boucher adds. “Whether you find it a good idea or not, these rigid rules serve as safeguards.”

The need for EU-led structural change

In the 1970s, the oil shocks were brutal and affected all forms of energy use, industrial electricity, transportation. But in a country like France, subsequent efforts to ease out of oil dependency by developing alternative sources of energy – nuclear power – and increasing energy efficiency paid off.

In France, the share of oil in energy production went down from 66 to 38% over the last 30 years, while energy independence rose from 23 to 50%.

Today, the crisis essentially affects transportation. “We realize that we failed to phase out the use of fuel in road and air transportation and that’s what we need to look at today,” says Notre Europe’s Boucher.

Faced with public pressure to find immediate solutions, the EU must balance the necessity to counter the effects of the oil crisis with its long-term commitment to sustainable development. The binding targets of 20 % renewable energy and 10% bio-fuel intended to reduce oil dependency and cut carbon emissions won’t be affective before 2020.
 
With protest movements spreading, the European Commission on Wednesday called on its members to take targeted action to help those most affected deal with rocketing oil prices. France closed a deal with oil giant Total to help fund the gas and oil heating subsidies for small-earning households.

Meanwhile, the barrel keeps on rising.