IMF Tells Europe Not to Repeat Its Costly Energy Crisis Mistakes

The European Union should not overdo fuel subsidies aimed at cushioning the oil shortage blow to businesses and consumers, the International Monetary Fund has warned, adding that some financial pain would prompt demand reduction instead of burdening the state coffers.

“Prices help reduce demand and bring supply and demand back into balance. Many measures under discussion weaken that signal,” the head of the European department of the Fund, Alfred Kammer, told Reuters.

“We recommend lump?sum transfers to vulnerable households. During the Russian energy shock, the average ‌fiscal cost in Europe was about 2.5% of GDP. Around 70% to 80% of those measures were untargeted. If support had been targeted to the bottom 40% of households, it would have cost only about 0.9% of GDP,” Kammer added.

The European Union is heavily dependent on oil and gas imports, with a lot of that coming from the Middle East, especially after the EU banned imports of Russian crude. However, demand for hydrocarbons is still very much high in the bloc, so the crunch caused by the U.S. and Israel war against Iran is causing a lot of pain in Europe.

The European Commission itself warned the governments of member states to avoid being too generous with the financial support lest the fuel price crisis turn into a fiscal one. “This is a unified effort from the Commission,” energy commissioner Dan Jørgensen told the Financial Times last week. “What happens in one sector of the economy can spill over to the rest of society.”

Many EU member states have cut fuel taxes in response to the crunch to keep prices manageable for most. Some have called on Brussels to relax its rules for state aid to handle the situation. The president of the European Central Bank added her own warning, saying “broad-based and open-ended measures” could feed “excessive” demand for fuels and drive inflation higher.

By Irina Slav for Oilprice.com

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