IMF tells Europe to let consumers bear the brunt of higher energy bills
The IMF said governments should strive to protect the most vulnerable households with targeted support, but noted that existing policies aimed at protecting all consumers were short-sighted.
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The International Monetary Fund has warned European governments against intervening in the region’s deepening energy crisis with broad-based financial support, saying instead that consumers should bear the brunt of rising prices to encourage energy savings and facilitate the wider switch to green energy.
The IMF said on Wednesday that governments should work to protect the most vulnerable households with targeted support, but noted that existing policies aimed at protecting all consumers from rising costs would hurt European economies – many of which are already on the verge of a recession – and would discourage the energy transition. .
“Governments cannot prevent the loss of real national income resulting from the terms-of-trade shock. energy and the abandonment of fossil fuels”, declared the European agency. IMF wrote in a blog post.
Large-scale price controls seen as short-sighted
So far, European policymakers have introduced far-reaching price controls, subsidies and tax cuts to soften the blow from rising energy costs, which have surged across the continent in the wake of Russia’s war in Ukraine and a wider supply glut.
But the Washington-based institute warned that such sweeping support was short-sighted, costing some governments an estimated 1.5% of gross domestic product this year while continuing to inflate demand – and therefore prices.
“Removing the retail price pass-through simply delays the necessary adjustment to the energy shock by reducing the incentives for households and businesses to conserve energy and improve efficiency. This keeps global energy demand and prices higher than they otherwise would be,” the report said. .
Europe is facing an unprecedented gas crisis.
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Instead, the IMF said policymakers should “decisively move away from general measures towards targeted relief policies”, specifically supporting the poorest households who are most vulnerable to rising prices but least able to cope with it.
Fully offsetting the increased cost of living for the poorest 20% of households would cost governments a comparatively lower average of 0.4% of GDP for the whole of 2022, he said. Doing so for the bottom 40% would cost 0.9%, he added.
The document added that it was “appropriate” for governments to support some otherwise viable businesses during a short-lived price spike, for example, if Europe were to face a complete cut off in gas flows from Russia.
However, he added that with prices set to remain higher for several years, the overall case for business support is “generally weak”.
Europe scrambles to reduce its energy consumption
The IMF comments come as European countries scramble to find ways to reduce energy consumption and dependence on Russian oil and gas.
Spain announced new energy-saving measures on Tuesday, including limits on air conditioning and heating temperatures in public spaces. This follows similar measures taken last week by the German city of Hanover, which said it was banning hot water in public buildings, swimming pools, sports halls and gymnasiums.
Meanwhile, the energy giants continue to reap the benefits of higher prices, with BP reporting its biggest quarterly profit in 14 years on Tuesday.
On Wednesday, United Nations Secretary-General Antonio Guterres criticized oil and gas companies for their apparent profiteering from the energy crisis.
“It is immoral that oil and gas companies are making record profits from this energy crisis on the backs of the poorest people and communities,” António Guterres said in a speech.
Guterres, like the IMF, said funds from energy companies – which amounted to $100 billion in the first quarter of 2022 – should be redirected to support vulnerable communities.