IMF urges Europe to use targeted support to stem war fallout

The IMF on Friday called on European countries to adopt limited measures to mitigate fallout from the Middle East war -- warning they should not do too much to shield consumers from cost hikes.

The US and Israel launched strikes on Iran on February 28, plunging the region into war and triggering Tehran's retaliation in virtually closing off the Strait of Hormuz, a key waterway for energy shipments.

This caused energy prices to skyrocket, with Europe particularly exposed due to its dependence on oil and gas imports.

The situation in Iran comes just four years after Russia's invasion of Ukraine triggered an energy shock where gas prices -- then largely dependent on imports from Russia -- soared.

"We are seeing many European countries putting together fiscal support packages for the population mostly, but also for firms," said Alfred Kammer, who heads the International Monetary Fund's European Department.

"Our recommendation here is not to suppress the price signal, because in the end, we need to balance demand and supply," he added at a press briefing.

Kammer added that the fund also recommends that countries target their fiscal support to the vulnerable, stressing the need to preserve resources.

"The last energy support packages we had during the Russian gas shut-off period cost on average 2.5 percent of GDP, and that's a large number," he said.

"If European countries had just focused on 40 percent of the population, the cost would have been 0.9 percent of GDP," he added.

This week, the IMF revised its 2026 growth forecast for the euro area down by 0.2 percentage points from January, to 1.1 percent.

Kammer said the IMF recommends that the European Central Bank maintains a neutral monetary policy stance for now.

The IMF and World Bank are holding their spring meetings in Washington this week, bringing finance ministers, central bankers and other leaders to the US capital.