Fiscal and structural resilience building responses to inflation during the 2022-23 energy crisis

A comparative analysis of the approach of the EU and three European countries

Between 2022 and 2023, Europe experienced an inflationary crisis driven by gas supply disruptions following Russia’s invasion of Ukraine, and compounded by post-COVID pandemic supply chain shocks. To support traditional monetary policy tools in combatting inflation, EU Member States deployed a range of so-called ‘unconventional’ fiscal policies aimed at protecting consumers from the increase in energy prices and limiting the pass-through of inflation to the wider economy. These fiscal policy measures were accompanied by a set of structural resilience building measures aimed at addressing the supply disruption in gas markets by improving the EU’s capacity to act in cases of extreme shortages and reducing the risk of future supply shocks.

This report examines the role of unconventional fiscal and structural resilience building policies in managing and reducing the likelihood of future supply shocks by drawing retrospective lessons from the responses to the energy crisis in the EU, France, Germany and Spain in 2022–23.

The comparisons focus on how the case study countries’ approaches fared in terms of reducing inflation and preserving economic growth, contributing to the decarbonisation of the economy, ensuring cost-effectiveness, debt sustainability and fairness, and contributing to long-term resilience and crisis readiness.

Recommendations

The authors make 12 policy recommendations for managing and avoiding similar inflationary supply shocks:

Fiscal policy recommendations

• Unconventional fiscal policies should play a role in managing inflation during future supply shocks. In France, Germany and Spain, these policies were effective at reducing inflation, maintaining economic output and minimising the welfare impacts of the inflationary shock in 2021–23.
• When facing a trade-off between acting fast and designing more targeted and tailored measures, speed of implementation of unconventional fiscal policies should be prioritised. The rapid deployment of unconventional fiscal policies in France and Spain was a factor behind inflation falling faster. Fast implementation was also effective at buying time for policymakers to introduce more targeted or structural interventions.
• Time-limited windfall taxes can represent a fiscally efficient tool to fund unconventional fiscal policies. Policymakers must balance short-term support to reduce inflation with long-term fiscal sustainability by combining some temporary taxes with limited borrowing.
• Where possible, unconventional fiscal policies should be tailored, targeted and time limited. Policies should be tailored to preserve price signals and targeted to the most vulnerable households and firms to reduce their welfare impacts of inflation. Measures should also be explicitly time limited, especially in cases where they incentivise consumption of energy-intensive goods.
• Invest in data collection and institutional data-analysis capacity to be able to respond in a swifter and more targeted way during future supply shocks. Investments should be made in the integration of data sources, expansion of social registries, recruiting of data analysts and systematic evaluations to identify informational and institutional gaps that might impede crisis response.
• Unconventional fiscal policy measures should prioritise support to vulnerable firms. Supporting firms during inflationary supply shocks is necessary to avoid inflationary spillovers, protect competitiveness and preserve critical production capacity. Small- and medium-sized enterprises (SMEs) should be supported alongside large firms, and policies should be designed in a way that maintains incentives to reduce energy consumption.

Structural policy recommendations

• Build on the default solidarity mechanism introduced during the energy crisis, develop cross-border gas infrastructure facilitating solidarity, and explore the possibility of extending similar solidarity obligations.
• Continue to implement buffer stocks in the form of EU-wide gas storage rules. Ensure storage rules are sufficiently flexible to strike the right balance between security of supply and the limitation of market disruptions during filling periods. When feasible, explore the possibility of cooperating with private actors to limit the public costs of buffer stocks for strategic resources.
• Pursue the efforts of the EU’s energy strategy REPowerEU laid out in response to the crisis, which sets the right approach of diversifying energy supplies away from Russian gas, and accelerating the deployment of renewable energy to meet the EU’s 2030 target of 42.5% of its final energy consumption.
• To advance both decarbonisation and energy independence, reduce the role of gas in the EU’s economy through further progress in electrification and scaling-up of clean technologies like batteries, smart grids or low-carbon gases. Since gas will continue to play a role in the EU’s energy mix (including in supporting the deployment of renewables by balancing intermittency), to avoid new dependencies after the move away from Russian gas, the EU should leverage its collective bargaining power through joint procurement when switching to alternative supplies.
• Advance electrification and complement supply-side with demand-side policies, either aimed at lowering electricity costs, such as grid fee subsidies, or at supporting the uptake of electrification technologies, such as subsidies or regulations favouring electric vehicles or heat pumps.
• Develop a strategy to address potential security of supply challenges of critical raw materials that will come with the move to renewables, clean technologies and related energy infrastructure. This strategy should combine improvement of the regulatory environment, better access to funding at the EU level, diversification through clean partnerships and the leveraging of EU buying power.