Growth, Fiscal Stance, and Governance: Unveiling Energy Poverty Volatility in the European Union

Abstract

Social cohesion and inclusive growth constitute the central pillars of the European Commission’s policy agenda. Meanwhile, the recurrence of energy crises exacerbates the living standards and raises the structural inequalities across European households. This paper exploits a Generalized Structural Equation Model (GSEM) to identify the effects of macroeconomic and political factors on the volatility in energy poverty. By moving beyond static levels, we examine volatility as a distinct dimension of vulnerability capturing the exposure to short-term shocks in energy affordability. The analysis is founded on a sample of 27 European countries between 2003 and 2022. The GSEM approach clarifies the drivers of the endogenous covariates, that is, the channels through which macroeconomic and political conditions are transmitted to energy poverty volatility. By decomposing the effects into within-country(cyclical) and between-country (structural) components, we find significant relationships that offer valuable insights for the design of effective policy measures. Economic expansion, higher public spending and household expenditure on maintenance of dwellings are directly linked with higher energy poverty volatility. Howbeit, political stability exerts a stabilizing effect, reflecting the importance of institutional quality and government effectiveness. Significant indirect mechanisms transmitted through growth reveal that cyclical expansions, inflationary pressures and short-term fiscal consolidations fuel energy poverty volatility. Growth, inflationary and tax-based driven volatility reflect asymmetrical effects on vulnerable consumers and rising energy deprivation in times of macroeconomic pressures. The results offer valuable evidence for the implication of effective fiscal and institutional policies that shield households from energy vulnerability and ensure affordable access to energy.