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The EU will still be hit by a “stagflationary shock” of low growth and rising inflation despite the US and Iran agreeing to a two-week ceasefire, the bloc’s top economic official has warned.
EU Economy Commissioner Valdis Dombrovskis said the European Commission is preparing to cut its growth forecasts for this year as the consequences of the conflict in the Middle East remain highly uncertain.
“It is certainly a welcome step towards de-escalation and is also expected to bring relief with regard to the energy crisis,” Dombrovskis said of the ceasefire in an interview with the FT.
But he warned that “there is of course still great uncertainty about the economic consequences of the war in Iran” and that it is “clear that we are facing a stagflationary shock”.
The Commission will update its official GDP forecast in May. Before the conflict began, the country had predicted EU growth would remain at 1.4 percent this year and 1.5 percent in 2027, with inflation slightly above 2 percent this year and next.
But recent Commission economic scenarios estimate that growth could slow by as much as 0.4 percentage points this year if energy prices return to pre-war levels with Iran by the end of 2026. Growth could slow by 0.6 percentage points both this year and next if energy prices take longer to return to pre-war levels, according to the analysis shared with the FT.
Inflation is also expected to rise by up to one percentage point this year in the committee’s first scenario, and by up to 1.5 percentage points both this year and in 2027 in the last scenario.
Investors have warned that a lasting decline in oil and gas prices will depend on whether Tehran loosens its grip on the crucial Strait of Hormuz export route after a two-week ceasefire.
The FT reported on Wednesday that Iran will require shipping companies to pay tolls in cryptocurrency for oil tankers passing through the strait, as the country tries to maintain control of the waterway during the ceasefire.
Several EU countries, including Italy, Poland and Spain, have introduced measures such as cutting fuel taxes to protect their industries and households from higher energy prices.
Dombrovskis reiterated that Member States should not turn the energy crisis into a budget crisis through excessive spending.
“We have less room for budgetary maneuvers than before” and therefore “need measures that are clearly temporary and targeted with limited budgetary implications,” Dombrovskis said.
The Commission will assess in June whether countries are on track to achieve their debt and deficit reduction targets, and whether they should continue so-called “excessive deficit procedures” against countries that have not reduced their deficits to the agreed levels.
The excessive deficit procedure carries an economic stigma and could ultimately result in EU financial sanctions.
Italy had hoped to end the procedure this year. But two EU officials warned this was now unlikely, after Italy’s statistics office recently said the country’s deficit stood at 3.1 percent of GDP last year – above the EU requirement of “less than 3 percent”.
Since the start of the war against Iran, Rome has called on Brussels to temporarily lift its budget rules through a “general escape clause”. This was brought about during the Covid-19 pandemic so that governments could buy their way out of the crisis.
Italian Prime Minister Giorgia Meloni said on Thursday that if the crisis in the Middle East escalates further, “we must seriously consider the question of a European response similar in approach and instruments to those deployed to respond to the pandemic”.
But Dombrovskis said there is “a general escape clause to address a severe economic downturn in the EU or the eurozone… currently we are not in this scenario”.
Additional reporting by Amy Kazmin in Rome
