"EU could face recession" - IMF predicts inflation will reach 5%
The International Monetary Fund (IMF) says the EU must respond to energy shocks with disciplined policies that protect vulnerable groups and strengthen resilience.
According to the financial institution, the European Union could be in recession, with inflation approaching the 5% threshold. No European country is immune. The energy shock, smaller than that of 2022 and now rooted in the Middle East conflict, "is weighing on growth and pushing inflation higher." The IMF estimates inflation at 2.8% in 2026, up from 2.5% in 2025.
The IMF points out that "some countries, such as Denmark or Sweden, with relatively low debt levels, have the necessary space to implement countercyclical fiscal policies, unlike France and Italy". The temptation is "simply to stop price increases, using restrictions, subsidies, or reductions in fuel excise duties", however, these are "imprudent measures". Untargeted support disproportionately benefits higher-income households, which consume more energy, the analysis continues.
During the 2022 crisis, European governments allocated an average of 2.5% of gross domestic product to energy support packages, over two-thirds of which were not targeted. An IMF analysis shows that fully compensating the bottom 40% of households for all the increase in energy costs would have required only 0.9% of GDP.
Finally, all these easing measures should have a clear end date. Some countries still have ‘temporary’ measures in place since the last crisis, which are clearly too long. According to the IMF, fiscal discipline was essential because European countries were already facing huge spending pressures on defence, an ageing society, pensions and healthcare, which the IMF estimated at 5% of GDP by 2040.
But voter pressure on politicians to intervene and compensate for high fuel prices was very high, because Europeans are used to expecting state support whenever a crisis hits after the COVID pandemic in 2020 and the Russian energy shock in 2022.
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