Europe’s energy dependence increasingly complicates the task of maintaining price stability. Meeting the continent’s clean‑energy targets would weaken the link between volatile global markets and domestic prices. Crucially, the tools to make this transition are already within reach.
By Frank Elderson
Europe’s energy dependence has become one of the critical vulnerabilities of our economy. Recent energy price shocks have transferred vast resources out of Europe, prompted emergency interventions and strained public finances. These costs are real, recurring and largely wasted.
Energy policy is the responsibility of elected governments, and rightly so. But Europe’s energy dependence also has profound implications for the ECB. Our primary mandate is price stability. Yet repeated energy price shocks make achieving this objective increasingly difficult.
Why do central banks care?
Europe remains among the advanced economies most reliant on imported fossil fuels. This vulnerability was starkly exposed following Russia’s unjustified invasion of Ukraine, when energy prices surged, pushing euro area inflation up to 10.6 percent in October 2022 and giving rise to what some aptly described as “fossilflation”.
Recent geopolitical tensions have highlighted how little this dependence has changed, with the conflict in the Middle East triggering another surge in European energy costs. The March 2026 ECB staff macroeconomic projections outline how this external shock could increase inflation and decrease growth.
This is a complex scenario for us to manage. Tightening monetary policy to contain inflation can deepen an economic slowdown, while loosening policy to support growth can entrench inflation.
In theory, central banks can look through temporary supply shocks, provided they do not spill over into broader and more persistent price pressures, inflation expectations remain anchored and wage-price spirals do not emerge. But repeated and persistent energy shocks test all these conditions, as ECB President Christine Lagarde highlighted in her recent speech.
Transition now – or pay more later
Europe cannot eliminate geopolitical risk, but it can significantly reduce its exposure to it. The most effective way to do that is by cutting reliance on imported fossil fuels and accelerating an orderly shift to home‑grown clean energy. If Europe were to meet its sustainable energy targets, the link between domestic energy prices and volatile global energy markets would weaken substantially.
Spain’s transition to renewable energy demonstrates the benefits of clean energy investment: estimates from the Banco de España indicate that wholesale electricity prices in early 2024 were approximately 40% lower than they would have been had wind and solar generation remained at 2019 levels.
Broader implementation of these strategies would mean fewer shocks to households, firms, public finances and financial markets – and ultimately greater macroeconomic and price stability.
Some argue that such a transition is prohibitively expensive. It is true that according to the European Commission, investment will need to reach around €660 billion per year between 2026 and 2030. But focusing only on these costs is profoundly misleading.
Investing in clean, sustainable energy replaces substantial spending on fossil fuels. Today, Europe spends nearly €400 billion each year on fossil fuel imports. By contrast, the marginal cost of producing home‑grown renewable energy is structurally lower. Once the infrastructure is in place, the energy itself is virtually free.
As a result, the adoption of domestically produced, clean and sustainable energy delivers far more than just climate benefits. It strengthens macroeconomic stability, lowers long‑term costs, supports economic growth, delivers health benefits and enhances Europe’s strategic autonomy – as recently highlighted in a speech by President Lagarde.
New analysis from the UK Climate Change Committee shows that for every pound invested in sustainable energy, the benefits outweigh the costs by a factor of 2.2 to 4.1. So it is no surprise that recent reports, including Mario Draghi’s “The future of European competitiveness”, identify decarbonisation as a core pillar of Europe’s long‑term economic strategy.
The choice is clear, if not easy
Fortunately, the tools needed to make this transition are within reach. It requires large upfront investments, deep and well‑functioning capital markets, and a predictable policy environment. Progress on the savings and investments union will be essential to mobilise capital at the necessary scale.
Policy certainty, combined with the right incentives, is essential to ensure that long-term perspectives are prioritised over short-term gains, and public and private objectives reinforce rather than undermine one another. This starts with delivering on existing decarbonisation targets and preserving the Emissions Trading System as a credible, market‑based instrument for carbon pricing.
None of this is easy. But the real question is no longer whether Europe can afford to make the energy transition. It is whether it can afford not to. From a central banking perspective, the answer is clear.
This blog post was published as an opinion piece in the Financial Times on 7 April 2026.
