Untargeted energy support cost European governments roughly 2.5% of GDP during the Russian energy shock, the International Monetary Fund says. The IMF says around 70% to 80% of the measures were untargeted, and targeting the bottom 40% of households would have cost about 0.9% of GDP. The warning comes as the Fund cut its global growth forecast to 3.1% in its April 2026 World Economic Outlook, citing the war in the Middle East and higher defence spending. That combination leaves less fiscal room for open-ended energy subsidies and increases the risk of rising inflation if price signals are weakened.

IMF's central finding

The IMF has urged European governments not to repeat the broad support policies used in past energy crises. Alfred Kammer, head of the IMF's European department, said price signals help to curb demand and restore balance between supply and demand. He added that many of the measures under discussion weaken that signal.

The Fund's analysis of the previous shock found the average fiscal cost across Europe was about 2.5% of GDP. It found most of that bill flowed to measures that didn't target poorer households. Kammer said that if support had been limited to the bottom 40% of households, the cost would have been closer to 0.9% of GDP.

The IMF recommended lump-sum transfers to vulnerable households as a cleaner way to shield those most in need. Lump-sums preserve the incentive for higher prices to reduce demand. They also cut the bill for taxpayers while keeping targeted relief in place.

How governments have responded

Several EU member states have chosen tax cuts and broad price support to blunt the impact of higher fuel costs. Those moves have been popular politically. They have also been expensive.

Some capitals have asked Brussels to relax EU state-aid rules to allow more generous packages.

Dan Jørgensen, the European Commission's energy commissioner, warned governments about being too generous. He said that what happens in one sector of the economy can spill over to the rest of society. The Commission has urged coordinated action to avoid measures that might turn a temporary energy shock into a lasting fiscal burden.

The European Central Bank has also signalled caution. The bank's president warned that broad-based and open-ended support could feed higher demand for fuels and push inflation up. This ECB's concern is that support aimed at keeping fuel cheap could make it harder for monetary policy to bring inflation back to target.

Wider economic backdrop

The IMF's warning comes in the context of a downgraded global outlook. In its April 2026 World Economic Outlook update the Fund cut its global growth forecast to 3.1% from 3.4% in 2025. The revision reflects the fallout from the war in the Middle East and other geopolitical risks.

The Outlook notes that military outlays are rising too. On average, defence spending has increased by about 2.7 percentage points of GDP and that increase is largely being financed by deficits. The Fund flagged that dynamic as contributing to fiscal dominance in some economies, a situation that reduces governments' room for manoeuvre.

Mastheads

At the same time, the IMF pointed to resilience in labour markets and partial normalisation of supply chains outside conflict zones. But it said those positives aren't enough to offset the fiscal shock from large, untargeted support combined with higher defence bills.

What changed and who's affected

Two things are different now compared with earlier crises. First, growth prospects have softened. Second, defence spending is consuming more fiscal space. That matters for energy policy. Governments with narrower fiscal room face harder trade-offs when fuel prices spike.

Households at the bottom of the income distribution remain most exposed to higher energy bills. The IMF's calculations show targeted support would have reduced the cost dramatically while still shielding poor households. By contrast, broad tax cuts and untargeted subsidies tend to benefit wealthier households and businesses that use more energy.

National budgets are affected too. When a large share of emergency support is unfocused, public debt rises faster. Higher debt makes it harder to fund public investment and to respond to future shocks without resorting to higher taxes or spending cuts.

The IMF framed the issue as a trade-off between short-term relief and medium-term fiscal stability. Cheap fuel reduces pain immediately. It also blunts the price signal that encourages lower consumption and faster market adjustment.

Targeted lump-sum transfers aim to square that circle. They provide relief to those who need it most. They let market prices discourage wasteful energy use. The group also limit the fiscal hit on budgets.

But targeting is harder to deliver quickly. It requires administrative systems that can identify and pay lower-income households. That leads some governments to prefer blunt instruments such as tax cuts. Those measures are faster. They're also costlier and less efficient.

Large, unfocused fiscal measures can affect market expectations about inflation and borrowing. If investors see deficits widening because of open-ended energy support, they may demand higher yields on government debt. That would raise the cost of borrowing for states and could crowd out other spending.

The IMF and the ECB are both signalling that preserving price signals matters for monetary policy. If governments blunt those signals, central banks may find it harder to bring inflation down without using higher interest rates. That would raise borrowing costs for households and firms.

Policymakers face a narrow set of choices. They can keep using broad support and accept higher fiscal costs. Or they can switch to targeted transfers and preserve fiscal room. The IMF's numbers show targeting would have cut the bill by more than half during the previous shock.

Other measures can help too. Temporary rebates for specific industries, better social safety nets and short-term income support can be designed to favour those in need. But every option has practical limits. Speed matters in a crisis. Administrative capacity and political will shape what's doable.

Politicians often favour fast answers. Tax cuts and price freezes deliver quick relief. Voters notice them immediately. Targeted transfers can look slow and technocratic. That political reality pushes governments towards blunt measures even when the economics favour targeting.

The Commission and the IMF are trying to shift the debate. They want member states to weigh the medium-term costs when designing emergency packages. The push is to avoid repeating past patterns that led to large public bills with limited efficiency.

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“Prices help reduce demand and bring supply and demand back into balance. Many measures under discussion weaken that signal,” said Alfred Kammer, head of the IMF’s European department.

This article was created with AI assistance.