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

Slides accompanying the speech

Thank 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.

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. 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.

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?