By Jan Strupczewski WASHINGTON, April 17 (Reuters) - European governments should not excessively shield businesses and consumers from more expensive energy because that distorts the price signal to
IMF: EU Must Limit Subsidies Amid Soaring Energy Prices, Focus on Vulnerable
IMF Urges Targeted Support and Fiscal Discipline in Response to Energy Crisis
By Jan Strupczewski
IMF Warns Against Excessive Market Intervention
WASHINGTON, April 17 (Reuters) - European governments should not excessively shield businesses and consumers from more expensive energy because that distorts the price signal to cut consumption and could be fiscally very expensive, the International Monetary Fund said.
Europe’s Energy Vulnerability Exposed
Europe's heavy reliance on oil and gas imports has left it exposed to spiralling prices since the Strait of Hormuz, a vital global oil and gas shipping route, was closed as a result of the U.S.-Israeli attacks on Iran and Tehran attacking energy infrastructure in the Middle East.
EU Commission’s Response to Soaring Prices
The European Commission wants to let countries spend more public money to help businesses with fuel and fertiliser bills as governments race to offset the economic shock from soaring prices.
IMF Recommendations for Government Interventions
Risks of Weakening Price Signals
"Prices help reduce demand and bring supply and demand back into balance. Many measures under discussion weaken that signal," the head of the IMF's European Department, Alfred Kammer, told Reuters.
Focus on Vulnerable Households
If governments do intervene, they should focus on the poorest households, as broad interventions tended to benefit higher‑income households, which consume more energy.
Targeted Support vs. Untargeted Measures
"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 said.
Need for Temporary and Well-Defined Measures
Finally, all such cushioning measures should have a clear end date. "Some countries still have 'temporary' measures from the last crisis in place, which is clearly too long," he said.
Fiscal Discipline and Political Pressures
Long-Term Fiscal Challenges
He noted fiscal discipline was crucial because European countries were already facing enormous spending pressures on defence, ageing societies, pensions and healthcare, that the IMF estimated at 5% of GDP by 2040.
Public Expectations and Political Realities
But voter pressure on politicians to step in and offset the high fuel prices was very high, Kammer said, because Europeans have come to expect state support whenever a crisis hits after the COVID pandemic in 2020 and the Russian energy shock in 2022.
(Reporting by Jan Strupczewski; Editing by Andrea Ricci )
