Piero Cipollone: The new energy shock: economic scenarios and policy implications

SPEECHThe new energy shock: economic scenarios and policy implicationsKeynote speech by Piero Cipollone, Member of the Executive Board of the ECB, at the 2026 Sustainable Development Festival Milan, 6 May 2026Thank you for the opportunity to speak at the Sustainable Development Festival.Today, I will argue that the current energy crisis serves as a powerful reminder that Europe’s path to robust and stable economic growth is only as viable as it is sustainable. We should care about sustainability not just, or even primarily, to protect the environment, but also because it is a key condition for our economic stability and prosperity. And in doing so, we Europeans can pursue our own specific interests, while also contributing to the common good.[1]We are facing the second major energy shock in just four years. Following on from Russia’s invasion of Ukraine in 2022, the war in Iran and the Middle East is now further hampering energy flows. And the closure of the Hormuz Strait is starting to disrupt global supply chains. This shock has interrupted a positive, hard-won trend of stable prices and robust growth in the euro area over the last two years.[2] Inflation had returned to target. Real incomes had recovered from the previous energy shock, boosting consumption. Investment was on the rise. And domestic demand was more than making up for the decline in net exports stemming from higher US tariffs and the surge in imports from China. Overall, the European economy was showing strong resilience to the prevailing trade uncertainty.[3]Now, this resilience is again being put to the test.The war in Iran and the Middle East is already having an impact on prices and quantities. Oil and gas prices have surged, feeding into short-term inflation. And supply tensions have started to emerge, for instance in relation to jet fuels. If sustained, the current shock could have significant implications for our medium-term inflation objective and the euro area’s economic outlook. So how can we best navigate this environment?In the short term, we face considerable uncertainty over the evolving geopolitical situation. To support our decisions, we have developed economic scenarios, in line with the lessons learned from our experience in recent years.[4] As geopolitical developments and their implications unfold, these scenarios provide us with a benchmark to assess the situation in real time, informing our monetary policy decisions. We are paying attention to possible signs of a de-anchoring of inflation expectations or of a break in economic dynamics, as we seek to ensure inflation returns to our target in a timely manner without unnecessary costs.While monetary policy can ensure the return of inflation to target over the medium term and fiscal policy smoothen the hit to economic activity, there are inevitable trade-offs associated with the response to negative energy supply shocks, which must be carefully calibrated. Over a longer time horizon, however, the broader policy implications are clear. Geoeconomic shocks have major effects on prices and the economy. And our dependency on fossil fuels multiplies these effects. The current energy crisis thus underscores the pressing need to further reduce our reliance on fossil fuels not only because of climate risks but perhaps even more clearly because of energy security risks that are likely to be with us for some time.[5] Decarbonising will make us better off, not worse off. In my remarks today, I will discuss the renewed energy shock and its short- and medium-term impact on inflation and the economy, before turning to the policy implications. The energy shock and its short-term impactLet me start by putting the current shock in perspective. Geoeconomic tensions have spiked in recent years, reaching their highest levels since the launch of the euro (Chart 1). These disruptions to international economic relations, primarily affecting trade and energy, have arisen in a world that has never been as interconnected as it is today, thus magnifying their impact.Chart 1 Index of geoeconomic tensions Share of newspaper articles in France, Germany, Italy and Spain referring to geoeconomic tensions and decomposition by source of tension(percentage)Source: Ioannou, D., Prioriello, R. and Durrani, A. (forthcoming), “Measuring Geoeconomic Tension: A Large Language Model approach for the euro area”, ECB Working Paper Series. The index is available here in dashboard format.Notes: The (L)arge-language-model (G)eoeconomic and Geo(P)olitical (T)ensions (LGPT) index for the euro area (main line) is constructed using two large language models (LLMs) on the basis of local language text (newspaper articles) in France, Germany, Italy and Spain. The index shows the number of newspaper articles discussing geoeconomic tensions as a share of the total number of articles. Geoeconomic tensions relate to the (potential or threat of) disruption to smooth international economic relations through the use of economic means such as trade or financial restrictions. The chart also shows the breakdown of the index into four sub-components based on the source of geoeconomic tension; namely, energy, trade, finance and technology. The latest observation is for April 2026. The cut-off date is 29 April 2026.The short-term effect of the war in Iran and the Middle East on global oil supply is larger than in the three previous energy crises (1973, 1979 and 2022) combined.[6] Even after accounting for mitigating measures, such as the rerouting of oil flows through pipelines and the release of strategic reserves, the net decline in supply is estimated at around 12 million barrels per day,[7] representing about 11% of the prewar global oil supply. Restoring supply after the war will take time given the damage to major oil facilities. As a result, oil prices have surged (Chart 2).Gas prices have also increased, but so far by much less than after Russia’s 2022 invasion of Ukraine. This is important in the European context given how closely correlated electricity and gas prices are. Chart 2 Oil, gas and electricity spot prices and futures(USD/bbl. and EUR/MWh)Sources: Eurostat and ECB calculations.Notes: the latest observation is for April 2026.At the same time, the closure of the Strait of Hormuz has affected the trade of numerous critical commodities and chemical products, such as liquefied natural gas, refined oil products, aluminium, helium, sulphur and fertilisers. This constitutes a negative supply shock for the euro area economy, reducing the availability and pushing up the price of critical inputs. There is already some evidence of longer delivery times, rising input costs and supply shortages, albeit still contained compared with those seen between 2021 and 2022 (Chart 3). Chart 3 Delivery times and supply bottlenecksa) PMI delivery timesb) PMI supply bottlenecks(diffusion index)Sources: HSBC/S&P Global/Haver Analytics and ECB staff calculations (panel a); S&P Global, Haver Analytics and ECB staff calculations (panel b).Notes: the latest observations are for April 2026 (panel a); the semiconductor price pressures average is 20.1 and the latest observations are for March 2026 (panel b).The shock has pushed consumer prices higher. Annual headline inflation rose to 3% in April (Chart 4), driven by a 10.9% increase in energy prices, whereas inflation excluding energy fell to 2.2%. Chart 4 Inflation in the euro area(annual percentage changes and percentage point contributions)Sources: Eurostat and ECB calculations.Notes: the latest observation is for April 2026.By pushing up consumer prices and exacerbating uncertainty, the shock is likely to reduce real incomes and hurt domestic demand, which had been the motor engine for the euro area economy in recent quarters.[8] Indeed, surveys point to a significant hit to economic sentiment (Chart 5). In particular, consumer confidence has dropped sharply, which will dampen consumption.[9] And the empirical evidence suggests that the shock will weigh on business investment, with European firms significantly cutting capital and R&D expenditure in the wake of an oil shock, unlike their US counterparts.Chart 5Economic sentimenta) Household confidence and expectationsb) Confidence across sectors(quarter-on-quarter percentage-changes, percentage balances)(percentage balances; index: February 2022 = 100)Sources: Eurostat, DG-ECFIN and ECB staff calculations (panel a); European Commission, Eurostat and ECB (panel b).Notes: the latest observation is for April 2026 (panel a); savings expectations refer to the qualitative European Commission consumer survey question: “Over the next 12 months, how likely is it that you save any money?”. The latest observations are for the fourth quarter of 2025 for private consumption, April 2026 for consumer confidence and March 2026 for all other indicators (panel b).In addition, the energy shock is also a terms-of-trade shock, further increasing the prices of euro area imports relative to exports, thus weighing on net exports.Meanwhile, the impact on economic activity could be compounded by the endogenous tightening of financing conditions, as banks become increasingly concerned about the economic risks facing their customers. Credit standards for loans to firms have already tightened in the first quarter, according to our latest bank lending survey.[10] This warrants close monitoring, especially as banks anticipate further tightening, which is expected to accelerate in the next quarter.On the other hand, the shock could be cushioned somewhat by households’ solid financial position, a still resilient labour market and government spending on defence and infrastructure. These factors, alongside business investment in new digital technologies, have underpinned domestic demand in recent quarters.Fiscal measures could also provide support, though they should remain temporary, tailored and targeted at the most exposed households and sectors. Otherwise, concerns about the cost t