Research

Not all energy shocks are alike. This column uses a multi-country, multi-sector DSGE model with production networks and trade linkages to compare a Europe-centric regional energy shock — akin to the 2022 Russian gas crisis — with a broader global energy shock like the current Strait of Hormuz disruption. The global shock worsens the EU's terms of trade more severely and triggers exchange rate depreciation rather than the appreciation seen under a regional shock. Crucially, while the regional shock still allows firms and consumers to substitute towards cheaper foreign goods and inputs, the global shock closes off this escape route — amplifying both the GDP contraction and the indirect inflationary effects through global supply chains.

Coverage: Dinner remarks by ECB Executive Board Member P. R. Lane at the Centre for European Reform (May 2026); FINANCIAL TIMES, Chris Giles on Central Banks newsletter, 19 May 2026.

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China’s industrial rise is a key external force influencing euro area trade, production and prices by reducing costs for euro area companies, via intermediate inputs, and increasing competitive pressures in European and global markets. Econometric analysis shows that the increase in the exposure of the euro area to intermediate goods imports from China has been positively associated with industrial production growth, whereas the increase in imports of final goods from China has tended to weigh on production. Model-based simulations can capture the increase in competitive pressures from China via sector-specific productivity shocks. The simulations suggest that, at the aggregate level, EU GDP increases in the short term, driven by positive income effects owing to cheaper imported goods and by reduced production costs resulting from cheaper imported inputs, while inflation declines.

Coverage: LA STAMPA, 11 May 2026; IL FOGLIO, 13 May 2026.

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