EU’s gas price gap mechanism may lead to negative consequences and increase volatility

On Thursday, the European Central Bank (ECB) stated that the current design of a “market correction mechanism” developed by the European Union (EU) needs to be revised. Measures initially aimed at curbing surges in natural gas prices now could put the financial stability of the eurozone in danger. 

A gas price gap mechanism was implemented by the EU in November of this year in order to decrease excessive volatility in commodity markets. The reason for developing this mechanism was a prior spike in energy prices. It caused a record rise in inflation and triggered tensions in energy derivatives trading. 

The ECB's formal opinion, signed by the central bank’s President Christine Lagarde, underlines that the EU's mechanism risks undermining the eurozone’s financial stability. Under certain conditions, the urge to mitigate sharp price fluctuations could potentially backfire.