The energy shock: current situation and policy considerations

Christine Lagarde, President of the European Central Bank, delivered a keynote speech at the 75th anniversary of the Association of German Banks. She highlighted the series of recent shocks impacting Europe, including a pandemic, war, energy crisis, and tariff increases.

Lagarde emphasized that these shocks have challenged Europe’s energy security, trade relationships, and military stability. She noted that lessons from past crises inform current policy responses.

The economic outlook remains highly uncertain due to the unpredictable duration of the conflict and its impact on energy prices and supply chains. The disruption of energy supplies, including a significant loss of oil, helium, and other critical inputs, could lead to shortages and inflationary pressures.

Monetary policy faces challenges in balancing inflation control with economic growth. The key factors are the duration of the disruption and the pass-through of energy prices to broader inflation. Fiscal policies should be targeted and temporary to support vulnerable populations without exacerbating inflation or undermining fiscal sustainability.

Lagarde concluded that the ECB remains committed to its inflation target of 2% and will act as necessary, emphasizing the importance of applying lessons learned to navigate the ongoing crises.