To support emergency spending aiming to mitigate a dramatic surge in living costs, European governments are increasingly reaching for a scarcely utilised weapon in the fiscal policy arsenal. In May, the UK and Hungary followed Italy and Spain in announcing windfall taxes on energy company profits. Those firms protest that the tax will reduce spare capacity for investments, deterring capital expenditure and foiling the drive to pivot away from fossil fuels. Precedent suggests that while prices remain high, this talk is overblown; companies are unlikely to leave a strong return on the table, especially when the levy comes with investment tax breaks. A 2011 surcharge hike of over 12% on North Sea producers barely made investors flinch before the 2014 oil price crash.

Concerns about creeping expropriation are also likely overblown in developed, democratic markets. The British government’s volte-face has suspiciously convenient timing, launching shortly after a report Downing Street lockdown parties. Still, the UK’s tax must be contextualised within the robust legal and democratic environment in which it is implemented. It is narrowly applied to additional profits that will remain significant this year and includes a three-year sunset clause delineating its intention as an emergency measure.

Investors in Hungary may be more concerned. Windfall taxes are applicable not only to energy firms, but also to insurers, banks, telecommunication companies and others deemed to be benefitting from loosely defined ‘extra profits’. Yes, there is only a two-year window in which levies apply, but this offers limited reassurance in an increasingly incoherent tax environment as the government recuperates the costs of pre-election handouts. Policy uncertainty is exacerbated by the recent adoption of a state of emergency, allowing the government to rule by decree.

Hungary arguably presents an outlier in Europe following the erosion of its rule of law, and demonstrates how such a decline raises operational risks across the board. In markets such as Germany, the operational trajectory is more likely to align with that of the UK, with windfall taxes marking a temporary and limited measure amid a unique geopolitical crisis.

This article first appeared in the Axco Flashpoints newsletter, which provides monthly analysis on country risk and geopolitics from our Global Risk team. You can sign up at