The new energy shock: economic scenarios and policy implications

Piero Cipollone, Member of the Executive Board of the ECB, delivered a keynote speech at the 2026 Sustainable Development Festival. He highlighted that the current energy crisis underscores the importance of sustainability for economic stability and growth.

The speech noted that Europe is experiencing its second major energy shock in four years, influenced by geopolitical tensions and disruptions in energy supply, notably from the Middle East and the Strait of Hormuz. These disruptions have led to surges in oil and gas prices, affecting inflation and supply chains.

Inflation in the euro area rose to 3% in April, driven by energy prices. Consumer confidence and domestic demand have declined, and supply shortages are emerging. Banks are tightening credit standards, which could further impact economic activity.

Economic scenarios developed by the Eurosystem suggest that prolonged shocks could significantly raise inflation and reduce growth. The adverse scenario projects inflation 1.5 percentage points higher and growth 0.8 percentage points lower until 2028. The severe scenario indicates even higher inflation and more persistent effects.

Monetary policy remains focused on maintaining price stability, with recent decisions to hold policy rates. The ECB monitors inflation expectations, wage developments, and firm pricing power to guide policy adjustments.

To increase resilience, Europe must reduce dependence on fossil fuels, which still account for over half of the energy mix. Progress has been made through renewable energy, with over two-thirds of electricity generation from low-carbon sources in 2024. Further efforts include integrating energy markets, expanding grid interconnections, and investing in storage capacity.

Europe’s energy transition offers opportunities for innovation, productivity growth, and leadership in sustainable finance. The continent is already a leader in green bonds and sustainable finance instruments, which can help hedge against risks related to climate and energy security.

In conclusion, the energy shock emphasizes the need for a balanced approach combining monetary, fiscal, and structural policies. Staying the course on energy transition is essential for price stability and long-term economic prosperity.

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