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The writer is a member of the Governing Council of the European Central Bank and Vice-Chairman of the Supervisory Board of the central bank
Europe’s energy dependence has become one of the critical vulnerabilities of our economy. Recent energy price shocks have diverted huge amounts of resources from Europe, triggered emergency interventions and put pressure on public finances. These costs are real, recurring and largely wasted.
Energy policy is rightly the responsibility of elected governments. But Europe’s energy dependence also has profound consequences for the European Central Bank. Our main mandate is price stability. Yet repeated energy price shocks make achieving this target increasingly difficult.
Europe remains one of the advanced economies most dependent on imported fossil fuels. This vulnerability was clearly exposed after Russia’s unwarranted invasion of Ukraine, when energy prices soared, pushing Eurozone inflation to 10.6 percent in October 2022 and giving rise to what some aptly described as “fossilfulation.”
Recent geopolitical tensions have highlighted how little this dependency has changed, with conflict in the Middle East leading to a new rise in European energy costs. The March macroeconomic projections by ECB staff outline how this is expected to increase inflation and reduce growth in 2026.
This is a complex scenario that we must manage. Tighter monetary policy to control inflation can deepen an economic slowdown, while looser policy to support growth can anchor inflation. In theory, central banks can absorb temporary supply shocks, provided they do not spill over into broader and more persistent price pressures, inflation expectations remain anchored and wage-price spirals do not arise. But repeated and sustained energy shocks are testing all these conditions, said ECB President Christine Lagarde marked recently.
Europe cannot eliminate geopolitical risk, but it can significantly reduce its exposure to it. The most effective way to do that is to reduce dependence on imported fossil fuels and accelerate an orderly shift to homegrown clean energy. If Europe were to meet its renewable energy targets, the link between domestic energy prices and volatile global energy markets would weaken significantly.
The Spanish transition to renewable energy shows the benefits of investing in it: estimates from the Banco de España indicate that wholesale electricity prices in early 2024 were about 40 percent lower than they would have been if wind and solar power generation had remained at 2019 levels.
Wider implementation of these strategies would mean fewer shocks to households, businesses, public finances and financial markets – and ultimately greater macroeconomic and price stability.
Some argue that such a transition is unaffordable. It is true that, according to the European Commissionbetween 2026 and 2030, investments will have to amount to approximately 660 billion euros per year. But focusing solely on these costs is extremely misleading.
Investing in clean, sustainable energy replaces substantial expenditure on fossil fuels. Today, Europe spends almost 400 billion euros on the import of fossil fuels every year. In contrast, the marginal costs for the production of renewable energy from our own country are structurally lower. Once the infrastructure is in place, the energy itself is virtually free.
New analysis The UK Climate Change Committee shows that for every pound invested in sustainable energy, the benefits outweigh the costs by a factor of 2.2 to 4.1. So it is no surprise that recent reports, including Mario Draghi’s “The Future of European Competitiveness”, identify decarbonisation as a core pillar of Europe’s long-term economic strategy.
Fortunately, the tools needed to make this transition are within reach. It requires large upfront investments, deep and well-functioning capital markets and a predictable policy environment. Progress on the Savings and Investment Union will be essential to mobilize capital on the necessary scale.
Policy certainty, combined with the right incentives, is essential to ensure that long-term perspectives are prioritized over short-term gains, and that public and private objectives reinforce rather than undermine each other. This starts with achieving existing decarbonization targets and maintaining the Emissions Trading System as a credible, market-based carbon pricing tool.
None of this is easy. But the real question is no longer whether Europe can afford to make the energy transition. What matters is whether it can afford not to. From the central banks’ perspective, the answer is clear.
