Fiscal policy responses to the EU energy crisis: Impact on inflation and energy prices

Abstract

The European Union (EU) is grappling with an unprecedented energy crisis characterized by soaring energy prices and mounting inflation, posing profound socio-economic challenges. This study investigates the efficacy of national fiscal policies within the EU in mitigating these twin pressures. Employing panel structural vector autoregression (PSVAR) models, we analyze the dynamic interplay between diverse fiscal policies and their inflationary repercussions across 20 EU countries from September 2021 to January 2023. The findings reveal a nuanced capability of fiscal interventions to temper energy-induced inflation, albeit with a limited overall impact on general inflation rates and energy prices. Price-suppressing measures exhibit the most significant and stable dampening effects while income-supporting policies yield the most erratic and unpredictable outcomes. The insufficient positive spillover effects of fiscal policies across EU member states underscore a fragmented fiscal policy framework, necessitating more coordinated effort and synergy. This study enriches the literature by empirically demonstrating the complex effects of fiscal policies on inflation and energy prices during crises. It underscores the urgency for an integrated and coherent fiscal strategy within the EU, advocating for institutional enhancements and cross-border policy harmonization. The practical implications of fostering a unified fiscal response are profound, offering a blueprint for mitigating current and future economic upheavals, thereby ensuring the EU’s long-term stability and prosperity.