The current energy shock is hitting the EU under more balanced circumstances than when Russia invaded Ukraine in early 2022 (Arce et al. 2026). Moreover, while still significant, the impact has largely been cushioned, so far, by unprecedented releases of oil reserves across the globe. Nevertheless, while the 2022 energy shock was more localised to European gas markets, the current shock is affecting gas and oil markets on a broader, global scale. If the shock persists, its full impact will not be cushioned any more by releases of oil reserves worldwide and, since the disruption in energy markets is intrinsically global, the transmission channels through which output and inflation are affected can be fundamentally different compared to a relatively more localised and Europe-centric energy shock.

In this column, I compare the impact of a global energy shock with a regional energy shock through the lens of a multi-country, multi-sector DSGE model with production networks and trade linkages, calibrated with four regions: the EU, the US, China, and the rest of the world (RoW). The regional energy shock is assumed to arise from trade frictions on EU imports of oil and gas from the RoW bloc, while the global shock arises from an exogenous decline in productivity in the RoW oil and gas-producing sector. For comparability, the regional and global energy shocks are both scaled to imply a 10% rise in the price of energy in the EU on impact, with a half-life of eight quarters.

Compared with a regional shock, a global shock not only directly raises the price of imported energy but also indirectly raises the price of energy-intensive imported goods. Indeed, under a global shock, other regions are hit alongside the EU, pushing up the price of all energy-intensive goods that the EU imports from them – whether for final consumption or as intermediate inputs. This leads to a larger increase in overall import prices and thereby generates a more pronounced deterioration in the EU terms of trade (Figure 1a).

While a regional shock triggers real currency appreciation and thus a loss in EU competitiveness in global markets, a global shock causes depreciation. In a regional shock, the EU real effective exchange rate appreciates as the price spike is concentrated in the EU, driving up domestic inflation and production costs relative to foreign competitors (Figure 1b). Conversely, in a global shock, the EU sees real currency depreciation because the shock is felt even more acutely in other regions that rely more heavily on oil and gas produced in the RoW bloc.

Figure 1 Effects of global versus regional energy shocks: Impact on EU terms of trade and exchange rates

Notes: Simulations from a multi-country, multi-sector DSGE model with production linkages and trade. The regional energy shock arises from trade frictions on EU imports of oil and gas from the RoW; the global shock from a decline in productivity in the RoW oil and gas sector. The shocks are both scaled to imply a 10 per cent rise in the EU energy price on impact, with a half-life of eight quarters. Panel a: difference between the change in export prices and import prices. Panel b: an increase in the EU real effective exchange rate indicates appreciation.

Despite the partial cushioning provided by real exchange rate depreciation, the global fallout implies a larger drop in net external demand (Figure 2). In a regional shock, the trade balance suffers from lost competitiveness; in a global shock, it suffers from a global collapse in external demand, which outweighs any price-competitiveness gains from a depreciating currency. Overall, in a regional shock the decline in GDP is driven mostly by weaker external demand, but the total fall is limited (Figure 2a). In a global shock, not only does external demand fall more, owing to a worldwide slowdown, but this is further compounded by an even larger decline in domestic demand. Indeed, the ability of consumers and firms to substitute to cheaper goods and inputs following a regional shock mitigates the impact on activity, whereas a global shock hinders these cost-mitigation options, resulting in a larger dampening effect on GDP. While a regional shock affects domestic firms’ competitiveness in global markets, there is also the possibility for both producers and consumers to pivot toward cheaper foreign inputs and goods, which partly mitigates the impact on production costs and household purchasing power. By contrast, a global energy spike leaves fewer consumer goods and production inputs that are unaffected, such that there is no relief via the import channel. This creates a compounding effect where the final price of a good reflects not just the direct increase in the local energy price, but the cumulated effects of price increases across international suppliers. Consequently, the total drain on GDP is more severe, as producers along the entire global value chain are simultaneously affected by the shock (Figure 2b).  

Figure 2 Effects of global versus regional energy shocks: Impact on EU GDP

Notes: Simulations based on a multi-country multi-sector DSGE model with production linkages and trade. The regional energy shock arises from trade frictions on EU imports of oil and gas from the RoW; the global shock from a decline in productivity in the RoW oil and gas sector. The shocks are both scaled to imply a 10 per cent rise in the EU energy price on impact, with a half-life of eight quarters.

Accordingly, a global shock has larger indirect effects on inflation than a regional shock. The direct impact on inflation is the same by construction: both shocks imply, on impact, a 10% rise in the price of energy and an increase of around 0.2 percentage points in the energy component of inflation (Figure 3). However, the indirect spillovers are larger in a global shock. 

In both cases, higher energy prices also increase domestic production costs, which are passed through to the prices of consumer goods and services. Currency appreciation partly mitigates the impact on inflation in a regional shock, while depreciation amplifies that of a global shock. In a regional shock, the indirect spillovers through higher costs for domestic producers are more limited and build up more gradually, with the non-energy component of inflation contributing to the peak rise in overall inflation after one year by only about 0.2 percentage points (Figure 3a). In a global shock, not only energy, but also production inputs and consumer goods become more expensive. These larger indirect effects have two main consequences compared with a regional shock. First, the rise in consumer prices of non-energy goods and services is more front-loaded (Figure 3b). Second, the indirect impact is larger overall, with the non-energy component contributing to the peak rise in overall inflation by around 1.1 percentage points. The relatively larger contribution of non-energy tradable goods (industry and agriculture) further underscores the role of imported inflationary pressures in a global shock.

Figure 3 Effects of global versus regional energy shocks: Impact on EU inflation

Notes: Simulations based on a multi-country multi-sector DSGE model with production linkages and trade. The regional energy shock arises from trade frictions on EU imports of oil and gas from the RoW; the global shock from a decline in productivity in the RoW oil and gas sector. The shocks are both scaled to imply a 10 per cent rise in the EU energy price on impact, with a half-life of eight quarters. “Agriculture” refers to NACE section A; “Industry” to sections C and F; “Services” to sections E, G-H-I, J, M-N and R-S; and “Energy” to sections B and D.

Overall, although a global energy shock may be less damaging to domestic competitiveness than a regional energy shock, its impact on inflation and GDP is much more severe. For inflation, the global shock is clearly more detrimental, due to stronger indirect effects operating through import prices and global supply chains. For activity, any concerns about competitiveness that might matter in a regional shock are more than offset by the large contraction in activity associated with a global energy shock. While cast in linear approximations, the simulations capture a rich set of indirect channels – such as international trade and global value chains. That said, given the short-run focus, oil and gas are assumed to be close to non-substitutable in production, which amplifies the negative impact on activity. In reality, however, producers can adapt over time by switching to alternative energy sources and adjusting their input mix.

Editors’ note: The views expressed here are those of the author. They do not necessarily reflect those of the ECB or the Eurosystem and should not be reported as such. The content of this column featured in Lane (2026).

References

Aguilar, P, R Domínguez-Díaz, J-E Gallegos and J and Quintana (2026), “The Transmission of Foreign Shocks in a Networked Economy”, Banco de España Working Paper 2607. 

Arce, Ó., N Battistini, O Bouabdallah, E Lis and M Mohr (2026), “A tale of two energy crises – initial conditions matter”, The ECB Blog, 3 June.

Bachmann, R, D, Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peichl, K Pittel and M Schularick (2024), “What if? The macroeconomic and distributional effects for Germany of a stop of energy imports from Russia”, Economica 91(364): 1157-1200.

Gnocato, N, C Montes-Galdón and G Stamato (2025), “Tariffs across the supply chain”, ECB Working Paper No 3081.

Lane, P R (2026), “Analytical perspectives on energy supply shocks”, dinner remarks at the Centre for European Reform, London, 13 May.