Iran War Could Mean Stagflation for Eu, Dombrovskis Says

Iran war could mean stagflation for EU, Dombrovskis says

EU Faces Economic Risks Amid Iran War and Energy Price Surge

By Jan Strupczewski

BRUSSELS, March 27 (Reuters) - The European Union economy is at risk of stagflation as a result of the surge in energy prices caused by the Iran war, European Economic Commissioner Valdis Dombrovskis said.

Stagflation Threat and Economic Projections

"The outlook is clouded by profound uncertainty, but it is clear that we are at the risk of a stagflationary shock, that is to say, a situation where a slower growth coincides with a higher inflation," Dombrovskis told a press conference after a meeting of EU finance ministers on the energy price surge.

Short-Term and Long-Term Scenarios

"This is the case even if the disruptions in energy supplies were to be relatively short-lived. In such a scenario, our analysis suggests that the EU growth in 2026 could be around 0.4 percentage points lower than projected in our autumn economic forecast, and inflation could be up to one percentage point higher," he said.

Last November, the Commission forecast European Union economic growth at 1.4% in 2026 and 1.5% in 2027. The euro zone economy was seen growing 1.2% in 2026 and 1.4% in 2027. The Commission forecast euro zone inflation around 2% in 2026.

Potential for Greater Disruptions

"If disruptions prove more substantial and longer lasting, the negative consequences for growth would be even greater. Growth could be up to 0.6 percentage points lower in both 2026 and 2027," Dombrovskis said.

Policy Responses and Energy Crisis Measures

Temporary National Measures

ENERGY CRISIS MEASURES MUST BE TEMPORARY

Building on the experience of the energy crisis caused by the 2022 Russian full-scale invasion of Ukraine, the ministers agreed that any national measures to cushion the impact of more expensive energy must be temporary, the chairman of euro zone finance ministers, Kyriakos Pierrakakis, said.

"Measures taken now should be targeted, fair and effective, prioritising the most vulnerable households and businesses. They must be implemented swiftly, but remain temporary, addressing the crisis without creating larger problems in the future," he told the press conference.

Importance of Clean Energy and Fiscal Constraints

"This crisis underlines the importance of investing further in clean energy infrastructure and Europe’s energy autonomy," he said.

Dombrovskis said any government policy responses would have an impact on budgets and pointed out most EU countries had very limited room for manoeuvre because of previous shocks and the urgent need for additional defence spending.

Upcoming International Discussions

He said more discussions on coordinating a policy response would take place at a joint G7 finance and energy ministers meeting on Monday.

(Reporting by Jan Strupczewski, editing by Bart Meijer and Alex Richardson)