IMF: EU energy subsidies risk inflation, debt

The International Monetary Fund (IMF) on April 17 advised European governments to avoid broad-based energy subsidies aimed at easing higher power and fuel bills, warning that sweeping support can blur price signals and add pressure to public finances.

Officials at the IMF linked the guidance to Europe’s exposure to imported oil and gas and the resulting sensitivity to price spikes. The fund said recent geopolitical events affecting Middle Eastern energy infrastructure have added to the strain, contributing to rising energy costs across the region.

Alfred Kammer, head of the IMF’s European Department, said that heavily insulating households and companies from higher prices can weaken incentives to cut consumption. The IMF’s position is that policy should preserve the signal that energy has become more expensive, while still protecting those least able to absorb the shock.

In parallel, the European Commission has indicated it is prepared to allow member states to raise public spending to help businesses manage higher costs, including fuel and fertilizer expenses. The IMF, however, argued that support should be designed to be more precise, recommending lump-sum transfers for vulnerable households rather than blanket price relief.

The fund pointed to lessons from the 2022 Russian energy shock. Kammer said untargeted measures made up 70% to 80% of the roughly 2.5% of GDP fiscal cost incurred in Europe at that time, and he estimated that focusing support on the bottom 40% of households would have lowered the cost to about 0.9% of GDP.

The IMF also emphasized that any cushioning steps should come with clear end dates. It noted that some interventions introduced as “temporary” during earlier crises are still in place, a pattern the fund warned can make it harder to restore normal budget settings once prices stabilize.

Fiscal constraints are central to the IMF’s message, as European governments face competing demands on public spending. The fund cited pressures tied to defense, aging populations, pensions, and healthcare, which it projects will reach 5% of GDP by 2040.

At the same time, the IMF said political expectations for state support remain elevated. It linked this to voter experience during the 2020 COVID-19 pandemic and the 2022 Russian energy crisis, when governments intervened heavily to cushion households and firms, shaping public demands for similar action during new price surges.