The International Monetary Fund (IMF) recently published a blog acknowledging that "soaring energy prices have sharply increased living costs" in Europe, and that those high costs are disproportionately hurting low-income families. Still, the IMF says that governments in Europe shouldn't broadly help consumers pay for outrageously expensive energy.
"They should allow the full increase in fuels costs to pass to end-users to encourage energy saving and switching out of fossil fuels," the IMF wrote. "Policy should shift from broad-based support such as price controls to targeted relief such as transfers to lower-income households who suffer the most from higher energy bills."
In other words, the IMF argues that governments should allow the rising cost of energy to pass directly onto consumers, rather than attempting to soften the blow, so that households and businesses will be forced to cut down on their energy use or switch to greener alternatives. To make up for the disproportionate effect on low-income households, the fund is calling on governments to offer targeted assistance for cost-of-living-expenses.
In comparison to the sort of assistance the IMF is asking for, the fund writes that prior government efforts to reduce the effects of energy inflation have been "broad-based, price-suppressing measures". According the IMF, these efforts fail because they stop households and businesses from cutting their energy consumption due to higher prices.
"Policymakers should shift decisively away from broad-based measures to targeted relief policies, including income support for the most vulnerable," the blog reads.
The IMF also says that the existing broad-based approach is just too expensive for the governments to cover relative to their economic output. Specifically, the fund says that these efforts have cost European governments more than 1.5% of their economic output this year.
The fund writes that low-income households in the United Kingdom and Estonia are both expected to see cost-of-living increases twice as high as those seen by wealthier citizens. The blog also acknowledges that increased energy costs will affect businesses, but argues against helping businesses cover energy costs long-term.
"It is difficult to implement a well-targeted support scheme for firms without introducing distortions and blunting the incentives for energy conservation. Since prices are expected to remain high for several years, the case for supporting businesses is generally weak," the IMF wrote.
The IMF is a group made up of 190 member-countries "working to foster global monetary cooperation and financial stability around the world."