## Reforming Europe Under Pressure

_IMF Blog, April 17, 2026_

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## Bibliographic details
- Authors: Alfred Kammer
- Published: April 17, 2026

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### 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*

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_Source: https://www.imf.org/en/blogs/articles/2026/04/17/reforming-europe-under-pressure_