A More Resilient Europe Faces a Renewed Energy Shock – But Difficult Trade-Offs May Resurface

Yves here. This is the sort of post that makes me want to pound my head on my desk. First, it ignores the elephant in the room, that the comparatively muted economic impact of the Iran-war-induced big drop in oil and gas supplies is due to running down inventories. Energy expert Steve Hanke estimates that the global fall in oil supply has been 14 million barrels a day but consumption has dropped only by 2 million barrels a day due to draining inventories. I don’t know the distribution across major economies, but once those buffers are exhausted, energy prices will spike because supply is inadequate and buyers will greatly bid up what is on the market.

Second, like far too many analyses, this article treats the energy impact as the only economic negative of the Iran war. As commodities maven Jeff Currie explained in A Crude Awakening, the effect of the loss of petroleum has bigger ramifications:

OIL IS THE RARE EARTH OF THE MACRO SYSTEM. Fifty years of efficiency gains have made oil cheaper per unit of GDP — but more irreplaceable in function. The remaining barrels are the ones for which no substitute exists: petrochemical feedstocks, aviation fuel, grid balancing, fertilizers. Remove them and you do not get demand destruction — you get production shutdowns. We believe the world is more vulnerable to an oil shock today than it was in 1973, not less.

Third, and Europe-based readers are welcome to correct me, but I do not see Europe as more resilient than early in the Special Military Operation. The depth of political fracture and repressive measures to combat that, such as election tampering in Romania and free speech clampdowns, say otherwise.

Note that the post did not include any images for Figures 3, 4, and 5, I assume this omission will be corrected  at some point.

By Maarten Verwey, Director General, DG Economic and Financial Affairs European Commission and Kristian Orsini, Deputy Head, Economic situation, forecasts, business and consumer surveys unit, DG ECFIN European Commission. Originally published at VoxEU

The conflict in the Middle East has triggered a renewed energy shock for Europe. While the macroeconomic impact is currently expected to remain more contained than during the 2021–22 energy crisis, this baseline depends critically on the assumption that supply disruptions prove temporary. This column argues that Europe is entering this episode from a stronger position, reflecting lower fossil fuel dependence, improved energy efficiency, and faster renewable deployment. But if energy prices remain elevated for longer than implied by current futures prices, difficult policy trade-offs could re-emerge. This makes it crucial to preserve incentives for further structural adjustment and avoid repeating the costly policy mistakes of the previous crisis.

The disruption of shipping through the Strait of Hormuz following the outbreak of the conflict in the Middle East has sharply reduced global flows of seaborne oil and liquified natural gas (LNG). The episode is a reminder that, despite significant progress in reducing dependence on Russian energy and diversifying supply sources, Europe remains exposed to external shocks as long as it relies heavily on imported fossil fuels (Corsello and Foschi 2026). Diversification can reduce vulnerability to individual suppliers, but it cannot fully insulate the economy from disruptions affecting global energy markets.

The transmission channels of this new energy shock – the second in less than five years – remain similar. Higher energy prices represent a negative terms-of-trade shock for Europe, transferring income abroad through more expensive fossil fuel imports. Inflation is expected to pick up again, initially driven by higher energy prices, before gradually broadening to more energy-intensive components of the consumer basket – including food – and eventually to stickier services inflation. Domestic demand is projected to lose momentum. Investment is expected to adjust most visibly, reflecting lower margins, tighter monetary and financing conditions, elevated uncertainty, and higher risk premia.

Private consumption is also set to moderate as higher inflation erodes real disposable income growth and households temporarily raise precautionary savings. The drag from net exports is also set to intensify, as weakening global demand exacerbates pre-existing price and non-price competitiveness challenges.

According to the European Commission 2026 Spring Forecast (European Commission 2026), after reaching 1.5% in 2025, EU GDP growth is currently projected to slow to 1.1% in 2026 — 0.3 percentage points lower than in the Autumn 2025 Forecast — while inflation is expected to rise to 3.1%, a full percentage point above the autumn projection. The impact of the energy shock is set to extend into 2027, with GDP growth recovering only modestly to 1.4% and inflation easing to 2.4% — still 0.3 percentage points higher than projected in autumn 2025 (Figures 1 and 2).  The impact of the conflict in the Middle East is, however, larger than suggested by a simple comparison with the Autumn 2025 Forecast (European Commission 2025).¹

Figure 1 Inflation breakdown in the EU

Source: European Commission Spring 2026 Forecast.

Figure 2 GDP growth in the EU

Source: European Commission Spring 2026 Forecast.

Even so, the macroeconomic impact to date is less severe than during the previous energy crisis. Several factors help explain why this shock is currently more contained. The earlier crisis resulted from the progressive tightening and eventual collapse of Russian gas supply to Europe at a time when the EU remained heavily dependent on pipeline imports and faced limited short-term substitution possibilities. Replacing Russian gas required a far-reaching reorganisation of Europe’s energy supply system, including new LNG import capacity, alternative supply contracts and significant adjustments to energy infrastructure. By contrast, the current shock stems primarily from disruptions to shipping and energy exports from the Gulf. While these disruptions affect globally traded energy markets and have repercussions well beyond Europe, they could unwind more rapidly once transport routes and export infrastructure return to normal operation.

The increase in energy prices has therefore remained so far more contained than during the 2021–22 crisis, particularly for gas prices, which during the previous crisis rose fifteen- to twenty-fold at their peak. Current futures prices remain broadly consistent with expectations that supply conditions will gradually improve over the coming months as shipping constraints ease. Accordingly, oil and gas prices are assumed to decline from current levels over the forecast horizon, although they are expected to stabilise somewhat above their pre-conflict averages.

Unlike during the previous energy crisis, the current shock is not hitting an economy already experiencing strong underlying inflationary pressures. The post-pandemic reopening dynamics have faded, labour markets, while still resilient, have started to soften, and financing conditions are far less accommodative.

Still, this comparatively benign baseline remains highly contingent on the disruption to global energy markets proving temporary. When the assumptions underlying current forecasts were formed, energy futures prices remained broadly consistent with expectations that shipping through the Strait of Hormuz would resume relatively quickly and that supply conditions would begin to normalise in the months thereafter. As the conflict persists, however, the window for such an outcome continues to narrow, increasing the risk that energy prices remain elevated for longer than currently assumed. Risks around the outlook therefore appear increasingly skewed towards a more prolonged energy shock.

If energy prices remain elevated for longer than currently assumed, pressures for policy interventions are set to intensify. In this context, lessons drawn from the previous crisis remain highly relevant.

The EU’s improved resilience today is largely the result of an ongoing structural adjustment triggered – and accelerated – by the previous energy crisis. Part of this adjustment was driven by the strong price incentives created by the surge in energy costs after 2021, but it also reflects deliberate policy choices, including faster renewable deployment, investment in energy infrastructure and efficiency improvements under initiatives such as REPowerEU, alongside landmark regulatory reforms initiated well before the crisis.

Since 2008, EU gross available energy has declined by around 20%, with roughly half of the reduction occurring in just the past five years (Figure 3) (Jaxa-Rozen et al 2026). At the same time, the rapid deployment of renewables has reduced the role of fossil-fuel generation in electricity production and weakened the transmission of gas price shocks to electricity prices (Figure 4) (Borg et al. 2026) Together, these developments have materially reduced Europe’s dependence on imported fossil fuels and its exposure to external energy shocks.

Figure 3 Structure of reductions in energy use in EU 2008-2024

Source: European Commission, Eurostat.

Figure 4 Electricity and natural gas (TTF) prices evolution in the EU

Note: Electricity futures (historical and future) are average for DE, FR, IT, ES, NL, BE and AT weighted with their GDP.
Source: ICE Futures Europe.

While structural adjustment has strengthened Europe’s resilience, the previous crisis also exposed the limitations of broad-based fiscal interventions aimed at shielding households and firms from higher energy prices. Following price increases in 2021 and 2022, governments also enacted sweeping fuel tax cuts and regulated retail prices. Through such measures, Member States can temporarily cushion the impact of higher energy prices for vulnerable households and energy-intensive firms, but Europe cannot subsidise itself out of an energy supply shock. Unless financed through lower spending or higher taxation elsewhere, the costs of these measures ultimately fall on public finances and between 2022 and 2024, their cumulative fiscal cost reached 2.2% of EU GDP. More fundamentally, broad-based price subsidies and untargeted tax reductions tend to suppress precisely the price signals that encourage energy savings, efficiency improvements and investment in alternatives. This matters not only for energy policy, but also for macroeconomic stability. By sustaining demand in the face of constrained supply, broad-based support measures can contribute to more persistent inflationary pressures and require tighter monetary conditions for longer. Higher financing costs would weigh on investment across the economy, including highly rate-sensitive investments in renewable energy, electricity grids, storage and energy efficiency (Jaxa-Rozen et al. 2026) – precisely the investment needed to strengthen Europe’s resilience to future shocks (Lane 2026, Schnabel 2023).

So far, the overall fiscal response has remained limited compared with 2022, reflecting both the smaller increase in energy prices and more prudence in a context of narrower fiscal space. The direct budgetary cost of measures adopted by early May remains limited to 0.07% of EU GDP in 2026.  If current measures were extended for the full year, the cost would rise closer to 0.1% of GDP (Balcerowicz 2026).

Figure 5 Design of energy support measures, 2022 and 2026

Source: European Commission Spring 2026 Forecast.

Importantly, the composition of many measures still resembles that of the previous crisis, with a strong reliance on broad-based price interventions (graph 5). This may become increasingly problematic if energy prices remain elevated for longer than currently assumed, as political pressure to expand existing schemes and introduce additional untargeted support measures would likely intensify.

The policy implication is therefore clear. Every euro spent suppressing energy prices largely finances higher fossil fuel import costs. By contrast, every euro invested in renewable generation, electricity networks, storage capacity, or energy efficiency reduces future vulnerability to external shocks. Fiscal measures may still be needed to cushion the impact of higher energy prices, particularly for vulnerable households and strategically important energy-intensive industries. But support should remain temporary, targeted and designed so as not to weaken incentives for energy savings, efficiency improvements and investment in alternatives. Europe’s resilience ultimately depends less on shielding the economy from adjustment than on accelerating the structural transformation already underway (Mramor et al. 2026). This is not a moment to weaken incentives for energy savings or slow the transition away from fossil fuels (Kammer 2026). It is precisely the progress accelerated by the previous crisis that allows Europe to confront the current shock from a stronger position.

See original post for references