New energy shock challenges euro area stability
ECB Executive Board member Piero Cipollone warned that a new energy shock, stemming from the war in Iran and the Middle East, poses significant risks to euro area economic stability. Speaking at the Sustainable Development Festival, he outlined scenarios and policy implications for the region.
Geopolitical tensions disrupt energy flows
The war in Iran and the Middle East, following Russia's invasion of Ukraine, has created the second major energy shock in four years.
The closure of the Hormuz Strait is disrupting global supply chains, leading to a net decline in oil supply estimated at 12 million barrels per day, or 11% of pre-war global supply.
Oil and gas prices have surged, pushing euro area annual headline inflation to 3% in April, driven by a 10.9% increase in energy prices.
This shock is expected to reduce real incomes, hurt domestic demand, and has already impacted economic sentiment, with consumer confidence dropping sharply.
Credit standards for firms have also tightened, according to the latest bank lending survey, warranting close monitoring.
Scenarios map inflation and growth risks
The Eurosystem has developed economic scenarios to assess the macroeconomic effects of the shock, which depend on its intensity, duration, and propagation.
Under the baseline scenario from March staff projections, higher energy prices are likely to keep inflation well above 2% in the near term, with clear upside risks from recent oil price developments.
Growth already came in below projections at 0.1% quarter-on-quarter in Q1. The adverse scenario assumes oil and gas prices peaking at USD 119 per barrel and €87 per MWh respectively, leading to cumulatively 1.5 percentage points higher inflation and 0.8 percentage points lower growth until 2028.
The severe scenario projects even stronger and more persistent price shocks, with oil at USD 145 per barrel and gas at €106 per MWh, resulting in cumulatively 6.3 percentage points higher inflation until 2028.
These scenarios will be updated in the June projections.
Decarbonization: A security imperative
The current energy crisis underscores the urgent need to reduce reliance on fossil fuels, not just for climate reasons but critically for energy security.
Geoeconomic shocks are magnified by fossil fuel dependency, making decarbonization a strategic imperative for economic stability.
This shift will ultimately leave Europe in a stronger, more resilient position.