European energy customers should shoulder high costs to encourage consumption changes, IMF says

Machines unload coal from a barge destined for the coal-fired Kraftwerk Mehrum power station near Peine, Germany.
Machines unload coal from a barge destined for the coal-fired Kraftwerk Mehrum power station near Peine, GermanySean Gallup/Getty Images
  • European governments should consider only targeted efforts to aid households dealing with soaring energy costs, said the IMF.

  • Costs for oil and natural gas and other energy sources have surged in the wake of Russia's invasion of Ukraine.

  • Broad-based financial support "delays the needed adjustment to the energy shock,' the institution said.

European households are contending with soaring energy costs,  but regional governments should only shield the most financially vulnerable in an effort to spur energy savings, said the  International Monetary Fund.

Countries including Germany, Spain, and France have enacted various aid plans to help residents cope with high energy costs which picked up substantially after major oil producer Russia invaded Ukraine in late February. Global oil prices have doubled, coal prices have nearly quadrupled and European natural gas prices have jumped almost seven-fold since early last year, the IMF said in a blog post published Wednesday.

"Policy," however, "should shift from broad-based support such as price controls to targeted relief such as transfers to lower-income households who suffer the most from higher energy bills," the Washington-based institution said.

"Suppressing the pass-through to retail prices simply delays the needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency. It keeps global energy demand and prices higher than they would otherwise be."

The average European household will see living costs rise about 7% this year relative to what the IMF had anticipated in early 2021, reflecting the direct effect of higher energy prices as well as their pass-through to other goods and services.

Governments providing financial cushions to households are denting their economies'  limited fiscal space and in many countries, the cost will exceed 1.5% of economic output this year, largely from broad price-suppressing measures.

Fully offsetting cost of living increases for the bottom 20% of households would cost governments 0.4% of gross domestic product average for 2022, the IMF said, adding that it would cost 0.9% of GDP to fully compensate the bottom 40%.

"Some governments are also supporting businesses. This is appropriate only if a short-lived price surge would cause otherwise viable firms to fail," the IMF said.

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