KEY INSIGHTS
- Uncertainty is now permanent: The pandemic, the war in Ukraine and now the war on Iran show that international conflicts drive up energy prices, erode purchasing power and threaten Europe’s strategic autonomy through its dependence on fossil fuels.
- Rate rises are the wrong tool: Making credit dearer slows the economy and raises the risk of unemployment, but it neither reopens the Strait of Hormuz nor adds a single cubic metre of gas.
- Intervene in prices and margins: The 2022 Iberian exception shows that capping gas costs in a systemic sector can protect incomes and curb inflation contagion at no fiscal cost.
- Accelerate the energy transition: Generating clean electricity and replacing fossil fuels wherever they are consumed is the only durable protection, and Spain’s renewables have already cut the gas pass-through to power prices by 75 per cent.
Uncertainty has become a permanent feature of our economies. The 2020 pandemic brought factories to a standstill and disrupted global production chains. Russia’s invasion of Ukraine in 2022 sent energy costs soaring. Now the war driven by Donald Trump against Iran, and the disruption of shipping through the Strait of Hormuz, are once again pushing up gas and oil prices.
These remain essential supplies because European economies still depend heavily on fossil fuels. The events change, but the mechanism recurs: international decisions and conflicts, arising from an ever more uncertain geopolitical environment, ultimately erode the purchasing power of millions of European households.
The immediate consequence is inflation that keeps resurfacing. According to Eurostat’s flash estimate, annual inflation in the euro area reached 3.8 per cent in September, against an average of 2.1 per cent in 2025. Energy prices rose by 18.8 per cent, after falling by an average of 1.4 per cent the previous year.
Europe is once again paying for its dependence on fossil fuels, whose prices are systemic. When they rise, so do the costs of transport, industrial production, heating, and fertilisers. These increases then feed through to food and other goods.
An electricity channel amplifies the effect further: when gas-fired power plants are needed to meet demand and set the marginal price, their fuel makes wholesale electricity dearer still. The magnitude and speed of this pass-through depend on contracts, regulation, and firms’ ability to pass on costs. If gas price increases persist, however, the energy shock eventually spreads through the economy’s entire price structure.
Moreover, the European Union is particularly exposed to swings in fossil fuel prices. Roughly 70 per cent of the energy available to it comes from fossil fuels. According to Eurostat, its dependence on gas imports reached 88 per cent in 2025, while its dependence on imports of oil and petroleum products stood at 96 per cent. The European Commission estimates that, between March and the end of July 2026, rising fossil fuel prices added €62 billion to the external energy bill. These resources leave the European economy, limiting its capacity to consume and invest, threatening its competitiveness, and undermining its strategic autonomy.
The asymmetry with the United States is stark. Trump can drive a war whose energy consequences fall most heavily on importing economies. His country is a net energy exporter, and many of its companies earn additional revenue when prices rise. American consumers suffer from higher prices too, to be sure, but Europe lacks a comparable energy-producing sector to offset this transfer of income abroad, and so it is hit even harder.
Yet European countries do not all face this blow in the same way. In economies such as Italy, Spain, Germany, and the Netherlands, where natural gas remains essential for both electricity generation and final consumption, rising gas prices translate directly into higher energy costs and greater inflationary pressure. As long as gas remains the price setter under the marginal pricing mechanism, every rise in the price of this commodity feeds into electricity prices.
Rate Rises Cannot Reopen Hormuz
Against this backdrop, the conventional monetary policy response used since 2022 is returning. On 10 September, the European Central Bank (ECB) raised its interest rates by a further 0.25 percentage points, bringing the deposit facility rate to 2.5 per cent, in an attempt to contain rising inflation. Making credit more expensive comes at a cost, however: it reduces consumption and investment, weakens economic activity, and raises the risk of unemployment, but it neither reopens the Strait of Hormuz nor directly increases the supply of gas. Responding to rising energy prices by slowing the economy therefore fails to resolve the inflation problem and forces households to bear a second burden: deepening economic stagnation.
The lesson of recent crises is that Europe does not need to raise interest rates but to pursue a different course in the face of the uncertainty Trump has created. Ultimately, it needs two complementary strategies.
Price and Profit Margin Controls in Systemic Sectors
The first is to intervene temporarily and selectively in prices and profit margins in essential sectors. Isabella Weber and other economists (for example, here and here) have shown that, in the current context, inflation is driven primarily by supply shocks to the prices of systemic goods, which propagate throughout the economy. A new framework for governing inflation is therefore needed to pre-empt this transmission. It requires monitoring costs and profits, limiting unjustified extraordinary profit margins, and establishing stabilisation mechanisms that can be activated in emergencies.
In this respect, the so-called “Iberian exception”, adopted in 2022, offers a useful precedent. Spain and Portugal capped the gas cost recognised in the bids of certain power plants and compensated them for the difference. This reduced the pass-through of gas prices, which were very high at the time, to the wholesale market. The mechanism let consumers pay a lower price than they would have without the intervention. The compensation was paid through a surcharge on consumers, but the net saving on bills came out of the inframarginal profits of electricity companies, at no fiscal cost.
Its lesson is clear: changing the rules of price formation can protect incomes and economic activity while curbing inflation contagion across the economy’s entire price structure. Implementing this approach at European level today would require accounting for interconnections and avoiding subsidies for unnecessary consumption, but it would be entirely feasible and desirable. Similar mechanisms could also be designed to prevent increases in refining margins, which are boosting oil companies’ profits at the expense of household budgets and at the macroeconomic risk of a new inflationary outbreak.
Break the Link Between Gas and Power
The second part of this strategy is to accelerate Europe’s energy transition. Amid turbulence in fossil fuel markets, the countries most dependent on gas for electricity generation are also the most vulnerable to sharp price rises. Indeed, the steep rise in gas prices across Europe pushed up the cost of gas-fired electricity by more than 50 per cent within days of the conflict’s start. Some countries, however, have partially broken this link between gas and electricity prices. Spain is one example: since 2019, the expansion of renewable energy has reduced the impact of costly fossil fuel power generation on electricity prices by 75 per cent.
Nevertheless, this expansion of renewables is still insufficient to guarantee a lower consumer price index, because transport and other energy uses remain exposed to oil prices, and because gas still sets the electricity price for a significant number of hours. It is therefore necessary to keep electrifying energy consumption, to expand the renewable sources that generate it, and to modify the marginal price-setting mechanism.
Strategic autonomy and the competitiveness of European industry require generating clean electricity and replacing fossil fuels wherever they are consumed. This means deploying renewables, expanding storage capacity, and strengthening electricity grids. It also means retrofitting homes, expanding the use of heat pumps, electrifying industrial processes, and strengthening public transport. Europe should jointly finance these investments and facilitate stable electricity contracts that pass the lower costs of this transition on to households and businesses. Support must also enable lower-income households to access these technologies; otherwise they will remain locked into the most vulnerable energy supplies.
Each new crisis confirms the cost of postponing this transformation. Protecting European citizens requires action on prices during the emergency and a lasting reduction in our dependence on fossil fuels. The less oil and gas Europe needs, the less power Trump, and other geostrategic actors, will have to determine our bills and shape our well-being.
Source: www.socialeurope.eu
