Reading time: 7 min
Germany, Italy, Spain, Portugal and Austria sent a joint letter to the European Commission on April 3 demanding a bloc-wide tax on energy companies’ surplus profits, the first coordinated fiscal response to an oil shock that has pushed Brent crude past $109 a barrel and driven eurozone inflation to 2.5 per cent in a single month.
The letter, addressed to EU Climate Commissioner Wopke Hoekstra and made public by Spanish Economy Minister Carlos Cuerpo, cited what the five signatories called market distortions caused by the war in Iran. It did not specify a tax rate. It did not name the companies that would fall within scope. What it did do was invoke the precedent of October 2022, when the Council of the European Union agreed to a “solidarity contribution” on fossil fuel firms after Russia cut gas deliveries, and ask the Commission to build a similar instrument on a new legal basis. That 2022 mechanism generated approximately 28 billion euros in additional public revenue across the fiscal years 2022 and 2023, according to a European Commission stocktaking report published in May 2025. The five ministers want something comparable, and they want it fast.
The Arithmetic of the Shock
The numbers justify the urgency, even if the policy response remains contested. Brent crude settled around $109.53 per barrel on April 6, according to market data, roughly 57 per cent above the $70 level that prevailed before the United States and Israel launched military operations against Iran on February 28. The benchmark posted its steepest monthly gain on record in March. European gas prices have risen more than 70 per cent over the same period, per Reuters, after Iran blocked most tanker traffic through the Strait of Hormuz, a chokepoint handling approximately 20 per cent of global oil and gas flows. EU Energy Commissioner Dan Jorgensen warned that the disruption means fuel prices are unlikely to return to normal in the foreseeable future.
The inflationary pass-through has been immediate. Eurostat’s flash estimate for March showed euro area annual inflation jumping to 2.5 per cent from 1.9 per cent in February, the highest reading since January 2025. The energy component swung from negative 3.1 per cent in February to positive 4.9 per cent in March. Core inflation, which strips out energy and food, held relatively steady at 2.3 per cent, but pipeline pressures from rising input costs have only just begun to build. The European Central Bank’s own March projections, published before the full extent of the price spike was visible, forecast headline HICP inflation averaging 2.6 per cent for 2026, revised up by 0.7 percentage points from December. Staff projections see inflation reaching 3.1 per cent in the second quarter before easing later in the year, a trajectory that depends entirely on the assumption that the conflict remains contained.
The ECB’s Impossible Position
This is the dilemma that makes the windfall tax debate more than a fiscal sideshow. The ECB held its deposit facility rate at 2.0 per cent at the March 19 meeting, the sixth consecutive hold, but the tone has shifted dramatically. Four major central banks froze rates within 48 hours of each other that week, and what followed was not relief but recalibration. President Christine Lagarde told reporters that the eurozone was no longer “in a good place” but rather “well-positioned and well-equipped” to deal with a major shock. That distinction matters. Markets have taken it, alongside the broader collapse in rate-cut expectations, as a signal that hikes are now on the table.
Barclays and J.P. Morgan have penciled in as many as three rate increases of 25 basis points this year, with the first potentially arriving at the April 29-30 meeting, per Reuters. Morgan Stanley sees two hikes by September, taking the deposit rate to 2.5 per cent. Interest rate markets are pricing an 88 per cent probability of an April hike, according to derivatives data as of April 4. Before the war, investors had expected no hikes at all, with a slight chance of further easing. Bundesbank President Joachim Nagel told Bloomberg News on March 20 that a more restrictive policy stance could be warranted if the medium-term inflation outlook deteriorated on a sustained basis. ECB Governing Council member Madis Muller said on March 31 that he could not rule out a rate increase in April.
That is the bind the five finance ministers are trying to break. If the ECB is forced to hike into an oil shock (a policy error Europe remembers vividly from 2008 and, to a lesser degree, from the early stages of the 2022 crisis), fiscal tools become the only lever available to shield consumers without compressing demand further. The ministers’ letter argued explicitly that a windfall tax would make it possible to finance temporary relief without placing additional burdens on public budgets. Hans Stegemen, chief economist at the Triodos Bank, called such taxes a “no-brainer” when a crisis generates windfall profits for fossil fuel producers at the direct expense of households and importing economies, as he told Euronews on April 4.
Why the Industry Is Pushing Back
The German Fuel and Energy Association, which represents refineries and petrol stations, responded within hours. The impression that companies were unjustifiably profiting was inaccurate, it said in a statement, adding that the primary goal was to maintain the supply of fuels under increasingly difficult conditions. That argument carries more weight than it did in 2022, when the refining margin expansion was largely a function of sanctions rerouting Russian crude. This time, the supply disruption is physical. Middle East oil production has been shut in, the Strait of Hormuz remains effectively closed, and Europe’s refined product supply, particularly jet fuel and diesel, is under acute pressure.
There is also the question of whether the 2022 mechanism actually worked. The solidarity contribution raised roughly 28 billion euros, but that figure represented under one tenth of the approximately 340 billion euros member states spent on energy support measures over the same period, according to the Commission’s own assessment. The revenue cap on electricity generators was more ambitious in design (an estimated 106 billion euros in theoretical yield based on 2022 prices, per European Parliament research) but proved difficult to implement uniformly across member states. Cyprus never adopted the regulation. Finland, Lithuania and Sweden reported zero revenues. The Tax Foundation, in a September 2024 analysis, concluded that the taxes penalised domestic production, reduced investment incentives and created significant investor uncertainty without achieving their stated goal of redistributing gains.
The five ministers are aware of the history. Their letter asked the Commission to develop a contribution instrument “grounded on a solid legal basis,” a phrase that tacitly acknowledges the legal fragility of the 2022 framework, which was adopted under Article 122 of the Treaty on the Functioning of the European Union, an emergency provision not designed for fiscal instruments. A Commission spokesperson confirmed the letter had been received and said the institution was assessing it, while working more broadly on targeted policy measures in response to the energy crisis.
What Happens Next
The political calculus is straightforward. Three of the eurozone’s four largest economies, along with Austria and Portugal (France and the Netherlands are notably absent from the letter, though France faces its own consumption crisis alongside persistently cautious households), are asking Brussels to act before the next ECB meeting on April 29-30. If Lagarde delivers a rate hike without any fiscal offset in place, the political pressure on the Commission will intensify. If the Commission announces a proposal before the meeting, the ECB may have marginally more room to hold.
The EUR/USD exchange rate, which lost 2.2 per cent in March (its worst monthly performance since July 2025, per Trading Economics) before recovering to approximately $1.15 in early April, adds another dimension. A tighter ECB would support the currency but choke an industrial sector already reeling from the energy shock. Eurozone industrial output fell for the second consecutive month in February. The composite PMI had been improving, reaching 51.9 before the war began, but confidence indicators have since softened sharply, with consumer confidence falling to its lowest level since late 2023.
The 2022 playbook is being reopened because governments have no other page to turn to. Whether a windfall tax can be designed quickly enough to matter, applied broadly enough to raise meaningful revenue, and structured carefully enough to avoid the investment damage the previous round inflicted, remains the open question. The ECB meets in 23 days. The energy shock is not waiting.
