Reforming Europe Under Pressure

IMF Blog, April 17, 2026

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Reforming Europe Under Pressure

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Bibliographic details

• Authors: Alfred Kammer
• Published: April 17, 2026

Overview: energy shock and growth outlook

• An energy shock, smaller than in 2022 and rooted in the Middle East war, is weighing on growth and pushing inflation higher.
• Initial data point to weaker private investment and consumption.
• Growth projections:
  • Euro area growth is projected at just 1.1 percent in 2026.
  • European Union growth is projected at 1.3 percent in 2026.
• In a more severe scenario described in the World Economic Outlook—a persistent supply shock compounded by tightening financial conditions—the EU could come close to recession with inflation approaching 5 percent.
• No European country is spared; the forecast comes with a high degree of uncertainty.

Fiscal and monetary: getting policy settings right

• Central banks should remain laser focused on keeping inflation expectations anchored and monitoring second-round price effects.
• Euro area monetary stance:
  • The IMF currently expects a cumulative 50 basis point increase in the policy rate by the end of this year, maintaining a broadly neutral monetary stance in light of higher near-term inflation expectations.
  • The desired response could be less or more depending on developments in global energy markets and second-round effects.
• Country-specific guidance:
  • United Kingdom: where inflation risks remain elevated, a restrictive stance should be maintained, suggesting limited scope for further rate cuts in 2026.
  • Several Central, Eastern, and Southeastern European economies: where inflation is still above target and wage growth remains strong, the case for a more restrictive stance is building.
• Financial stability actions:
  • Monitor vulnerabilities in both bank and nonbank sectors.
  • Stand ready to release capital buffers if systemic risks materialize.
  • Ensure liquidity support is available to eligible institutions that need it.
• Fiscal policy constraints and guidance:
  • Fiscal policy must work within available fiscal space; high-debt countries without fiscal space cannot afford to widen deficits—any energy-related measures must be fully offset.
  • Countries with more room (example given: Denmark or Sweden) can use countercyclical fiscal policies; France and Italy do not have such space.
  • Sovereign yields have already risen in several markets; high-debt countries need to stick to consolidation plans to keep borrowing costs anchored and preserve capacity to respond if conditions deteriorate.

Targeted and time-bound support: avoid broad, open-ended measures

• Untargeted support is inefficient:
  • During the 2022 crisis, European governments spent an average of 2.5 percent of gross domestic product on energy support packages—more than two-thirds untargeted.
  • IMF analysis shows that fully compensating the bottom 40 percent of households for the entire rise in energy costs would have required just 0.9 percent of GDP.
• Downsides of broad support:
  • Broad support disproportionately benefits higher-income households who consume more energy.
  • Broad support suppresses the price signal that drives reduced consumption, improved efficiency, and investment in alternatives, slowing the adjustment that resolves a supply shock.
  • Measures that eliminate the price signal can become costly to sustain long after the emergency has passed and lead to less efficient energy use.
• Best practice:
  • Targeted support is much more effective.
  • Announce binding end dates for targeted measures to ensure budget resources are not wasted and don’t crowd out investments needed to strengthen Europe’s energy system.

Building resilience: structural reforms and energy integration

• Structural drivers of high industrial energy prices:
  • Industrial energy prices in the EU are now roughly double their pre-2022 levels and substantially higher than those in the US, rooted in imported oil and gas dependence and fragmented energy markets.
• Progress and policy priorities:
  • More than 50 percent of EU electricity generation now comes from low-carbon sources, reducing exposure to oil price swings.
  • Completing the energy single market, maintaining the EU’s Emissions Trading System, and accelerating cross-border grid interconnection are core policy paths to structurally lower and more stable energy costs.
• Broader reform benefits (IMF analysis):
  • Fully closing domestic structural policy gaps and integrating labor and product markets to the levels observed within the US could raise European productivity by 20 percent.
  • Such reforms could mobilize up to €800 billion in additional private investment over ten years.
  • As a result, output per person would be higher by 35 percentage points.
• Policy framing:
  • Closing the income gap with the US can be achieved by reforms that are within Europe’s control.
  • Reforms would deepen financial integration and raise Europe’s shock absorption capacity.

Policy imperative: reform now, not later

• Europe’s response should combine:
  • Robust macroeconomic policy fit for frequent, unpredictable shocks.
  • Building resilience without wasting fiscal resources or getting in the way of markets.
• The choice is between:
  • Costly measures that do not reduce vulnerabilities, and
  • Policies that protect the most exposed today while building foundations for a more resilient tomorrow.
• Crises create pressure to defer hard choices; postponing reforms risks slower growth, higher debt, and diminished capacity to act when the next shock arrives.
• In a world with more frequent and overlapping shocks—geopolitical disruptions, climate events, financial volatility—the capacity to respond is a strategic asset built through sound macroeconomic management, disciplined fiscal policy, and structural reforms, especially in the energy sector.
• Conclusion: Europe must reform under pressure; the current shock is not an argument for delay but a reason to push forward the reform agenda.

Alfred Kammer, April 17, 2026 — Reforming Europe Under Pressure