Cipollone warns of new energy shock impact on euro area
Piero Cipollone, Member of the Executive Board of the European Central Bank, outlined economic scenarios and policy implications of a new energy shock. Speaking in Milan, he emphasized the challenges for the euro area's inflation and growth outlook.
Geopolitical tremors disrupt energy flows
The euro area faces its second major energy shock in four years, stemming from the war in Iran and the Middle East and the closure of the Hormuz Strait.
This has interrupted a period of stable prices and robust growth, with oil and gas prices surging and supply tensions emerging, particularly for jet fuels.
Geoeconomic tensions have reached their highest levels since the launch of the euro.
The current oil supply decline, estimated at 12 million barrels per day or 11% of pre-war global supply, is larger than the three previous energy crises combined (1973, 1979, 2022).
While gas price increases are less severe than after Russia's 2022 invasion, the Hormuz closure impacts critical commodities, leading to longer delivery times and rising input costs.
Headline inflation rose to 3% in April, driven by a 10.9% increase in energy prices, challenging real incomes and domestic demand.
Scenarios map future inflation and growth
The Eurosystem uses economic scenarios to assess the energy shock's medium-term impact.
The baseline projects near-term inflation above 2 percent, with upside risks from oil and downside risks to growth.
An adverse scenario, with significantly higher energy prices, forecasts higher cumulative inflation and lower growth until 2028.
A severe scenario anticipates an even stronger shock, leading to substantially higher cumulative inflation.
Monetary policy aims for timely inflation return, while fiscal policy can cushion the economic impact.
Decarbonisation is crucial for energy security, reducing fossil fuel dependency.
Decarbonisation: A security imperative
This speech effectively highlights the dual imperative of decarbonisation, moving beyond climate concerns to emphasize energy security.
While the scenarios provide a crucial framework for policy, the underlying vulnerability to geopolitical shocks remains a significant challenge.
Europe's economic stability is now inextricably linked to its ability to rapidly transition away from fossil fuels.