-- Shielding consumers from high energy prices is "fiscally expensive" and delays consumption cuts, the International Monetary Fund stated Friday in comments that fly in the face of government efforts to soften the blow of fuel price surges.
It has warned European governments that broad energy subsidies are distorting market signals and delaying necessary consumption cuts.
In a new technical briefing published on Friday, the IMF urged a pivot to targeted support to preserve fiscal discipline as the Middle East conflict chokes global supplies.
The organization argued that broad-based subsidies are sabotaging global efforts to stabilize energy markets.
Alfred Kammer, Director of the IMF's European Department, noted that while price caps and fuel tax cuts are politically popular, they create a dangerous "demand rigidity."
By artificially lowering prices, governments prevent the very consumption cuts needed to balance a global supply chain that has seen zero new tankers loaded in the Middle East throughout March.
"Excessive shielding distorts the price signal to cut consumption," the IMF stated in its regional assessment.
The Fund emphasized that if demand does not fall in response to the Strait of Hormuz closure, energy prices will remain "higher for longer," potentially pushing the Eurozone into a deep recession with inflation nearing 5%.
This warning coincides with a bleak outlook from IEA Chief Fatih Birol, who reportedly said that it will take two years to restore Middle Eastern energy output to pre-war levels.