IMF: Renewables have mitigated the costs of the energy shock in Europe; let’s press ahead with the green transition

In this context, the IMF defends the European Union’s main instrument for achieving these objectives, namely the carbon emissions trading scheme, which has come under fire from governments such as Italia’s and from energy-intensive industrial sectors. The ETS, the report states, helps ‘to maintain clear price signals and to support long-term investment decisions’.

The International Monetary Fund warns that ‘with medium-term growth potential of around 1.1 per cent, even a modest shock could plunge the eurozone into recession’. This vulnerability will remain, even once the surge in energy prices has subsided.

The diagnosis has long been clear: at the root of the problem lies low productivity, which reflects a lack of scale and innovation. The still-incomplete single market and national barriers prevent businesses from reaching an efficient scale, accessing adequate finance and tapping into a wider market. The result is a reduced incentive to invest.

Despite the abundance of highly skilled workers, the IMF states, innovation therefore remains ‘incremental and concentrated in traditional, low-growth sectors’, rather than in cutting-edge sectors.

And the advent of artificial intelligence is already widening the gap with the United States. Studies by the Fund show that the development and use of intangible capital, including early forms of AI, contributed to US labour productivity growth at more than twice the rate seen in the European Union over the period 2015–24.

According to the IMF, the elimination of all remaining distortions in national policies and the removal of the cross-border barriers to trade and labour mobility that still exist within the EU ‘could increase productivity by around 20 per cent’, thereby attracting “up to €800 billion in additional investment over a decade”. Per capita GDP would rise by around 35 per cent.

Faced with these challenges, the Fund argues that protectionist policies and measures designed to shield Europe from fluctuations in global commodity prices or from international competition can only buy time, but at the cost of costly distortions.

Defence spending, the energy transition and an ageing population are increasing the pressure on public finances, which already have limited room for manoeuvre. At the same time, rising yields in some countries are driving up borrowing costs, whilst sluggish growth is complicating the picture. “Without fiscal consolidation, these forces would put European countries’ public debt on an unsustainable path,” warns the IMF.

In this challenging environment of low growth and rising inflation, the Fund expects at least one further rate rise of 25 basis points in 2026, followed by another tightening to bring the headline inflation rate back to the 2 per cent target in 2028.