European governments should not overly protect companies and consumers from higher energy prices, as this distorts the price signal that should lead to reduced consumption and could become very costly fiscally, warns the International Monetary Fund.
Europe’s high dependence on oil and gas imports has left it vulnerable to rapid price increases after the closure of the Strait of Hormuz, a vital global route for oil and gas transportation, following American-Israeli attacks on Iran and Tehran’s attacks on energy infrastructure in the Middle East.
The European Commission wants to allow countries to spend more public money to help companies cover fuel and fertilizer costs, as governments try to mitigate the economic shock caused by rapid price increases.
"Prices help reduce demand and restore the balance between supply and demand. Many of the measures under discussion weaken this signal," said Alfred Kammer, head of the IMF's European Department, to Reuters.
If governments do intervene, however, they should focus on the poorest households, as general interventions tend to benefit higher-income households that consume more energy.
"We recommend lump-sum transfers to vulnerable households. During the energy shock caused by Russia, the average fiscal cost in Europe was about 2.5% of GDP. Approximately 70% to 80% of these measures were not targeted. If the support had been directed to the poorest 40% of households, it would have cost only about 0.9% of GDP," Kammer said.
Ultimately, all these mitigation measures should have a clear end date. "Some countries still have 'temporary' measures in place from the past crisis, which is clearly too much," he said.
He emphasized that fiscal discipline is crucial, as European countries are already facing huge spending pressures for defense, population aging, pensions, and health, which the IMF estimates at 5% of GDP by 2040.
However, the pressure from voters on politicians to intervene and offset high fuel prices is very high, Kammer said, as Europeans have come to expect state support whenever a crisis occurs, following the COVID pandemic in 2020 and the energy shock caused by Russia in 2022.
Earlier this month, the Government approved a 30-bani per liter reduction in diesel excise duty, and at the end of March, it extended the cap on commercial markup for basic foodstuffs.