Will Europe respond to the latest energy price shock with fiscal measures?

Investing.com - Citigroup Research recently stated in a report that European governments are expected to cut transportation fuel taxes as their first line of defense against the sharp rise in energy prices. However, if prices remain high, broader fiscal support measures may be introduced.

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Since the conflict began, crude oil and recent natural gas prices have increased by approximately 45% and 65%, respectively, compared to the first two months of 2026. Eurozone gasoline prices have risen about 10% from January-February levels, while diesel has increased by 18.3% during the same period.

According to economists Michel Nies and Giada Giani, these increases, based on constant consumption levels, will add an extra €40 billion annually to household expenses, equivalent to 0.25% of GDP. Businesses will also spend about €20 billion more.

The report states: “The fiscal cost may be a nonlinear function of price shocks. If more adverse energy price scenarios occur, governments may soon have to implement more extensive measures.”

The annualized cost of maintaining transportation fuel prices at pre-conflict levels through tax differentials is about €60 billion for the Eurozone, roughly 0.4% of GDP. Of this, approximately €11 billion is foregone tax revenue rather than new expenditure. Given Citi’s baseline scenario that oil prices will only temporarily spike, actual costs should be “significantly lower.”

The report notes that reducing excise taxes to Europe’s minimum standards—€3.59/liter for gasoline and €3.30/liter for diesel—cannot fully offset recent price increases in many countries, implying that VAT reductions may also be necessary.

Some governments have already taken action. Greece has set limits on profit margins for fuel and 61 supermarket goods.

Portugal has temporarily cut diesel excise taxes. Croatia has implemented retail fuel price caps. According to the Financial Times on March 11, measures at the EU level, including caps on natural gas prices, are reportedly under consideration.

Utility bills have not yet shown dramatic responses. As of last week, German natural gas suppliers continued to offer new household customers a price of 8.4 euro cents per kWh, below the 10.2 euro cents per kWh from a year earlier.

The semi-annual adjustment of utility prices means consumers may not feel pressure for several months.

An 8% increase in household utility bills would add about €35 billion annually to consumer costs. Unlike transportation fuel costs, utility bills tend to be more difficult to reverse once they rise.

Citigroup states that the overall fiscal cost of mitigation measures appears manageable, “likely below 0.5% of GDP,” but warns that if utility bills begin to rise sharply, governments may no longer be able to limit support measures solely to energy-related taxes.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.