Recent research by the International Monetary Fund (IMF) has revealed significant gaps in EU governments' response to the energy crisis, noting that two-thirds of subsidies and tax cuts have not been precisely targeted at the most vulnerable.
Despite Brussels' repeated recommendations to keep interventions "temporary and limited," member states continued to implement comprehensive measures, raising questions about the efficiency of using tax revenues with other spending priorities in place.
Warnings of the "trap" of political pressures and the accumulation of burdens
Alfred Kamer, head of the IMF's Europe division, expressed concern that governments are finding it very difficult to roll back energy subsidy measures once they are passed.
Continuing with these policies will inevitably lead to increased fiscal burdens over time, Kammer said, noting that policymakers appear to have "not grasped the lessons of 2022" following Russia's invasion of Ukraine, where budgets in comprehensive support have been depleted and economies have been hit hard.
The IMF believes that public finances in large parts of Europe are in a very "fragile" position following the costs of the COVID-19 pandemic.
With borrowing costs soaring to record levels, countries such as Italy, France, Belgium and Greece are at risk of backlash from bond investors. Kammer warned that countries that lack sufficient "fiscal space" cannot afford any new support measures without parallel budget cuts, to avoid losing market confidence.
Beyond the financial figures, the IMF warned of the impact of these policies on the future energy profile, as setting a price cap or cutting taxes removes the real "price signal" from the market.
This distortion leads to continued high demand despite supply shortages, and more seriously, it kills the incentive for consumers and businesses to switch to renewable or alternative sources of energy, which could prolong the crisis and make it more expensive and complicated to get out of it.
These warnings come at a sensitive time when pressure is mounting to protect families from the fallout from conflicts in the Middle East, which have directly impacted the security of supplies through vital corridors such as the Strait of Hormuz.
While countries such as Germany, Spain, and Italy have resorted to temporary tax cuts as a quick fix, the IMF stresses that these "palliative solutions" could put European economies in a long-term financial predicament if the global energy market turmoil continues.
Avoiding a repeat of the continent's energy crisis in 2022
EU officials are urging governments to avoid providing excessive subsidies to offset rising energy prices, warning that the shock from Iran's war "could turn into a financial crisis."
In its discussions with member states, the European Commission insists that proposed energy subsidies , tax cuts and price caps be limited in duration and scope, according to sources familiar with the talks.
Brussels is seeking to avoid a repeat of the continent's 2022 energy crisis, which has led to runaway inflation and a growing budget deficit.
Several countries, including Italy, Poland and Spain, have cut fuel taxes, while others have called for the easing of EU rules on state subsidies. Rome is also pressing Brussels to ease financial restrictions to give capitals more flexibility.
The war has sent oil and gas prices in Europe up nearly 60 percent and sparked fears of shortages of diesel and jet fuel. The European Commission says the conflict "carries a significant risk of rising inflation and its negative effects."