Valdis Dombrovskis. Photo: European Union
“This is certainly a welcome step towards peace. It should also ease the energy crisis. But the economic consequences of the war in Iran are of course still shrouded in a thick haze of uncertainty. One thing is clear: we are heading for a stagflationary shock,” Valdis Dombrovskis, the European Commissioner for the Economy, told the Financial Times.
He specified that the European Commission will update the official GDP forecast in May. Before the conflict, the agency predicted the growth of the EU economy by 1.4% this year and 1.5% in 2027. Inflation was expected to be slightly above 2% this year and next year.
However, the Commission’s recent economic scenarios give a different picture. Growth could slow by 0.4pc this year – assuming energy prices return to pre-war levels by the end of 2026. If they take longer, growth would slow by 0.6p/p this year and next year. This is the analysis the FT has provided to the Commission.
Under the first scenario, projected inflation would rise by a full percentage point this year. In the second, by 1.5pc this year and in 2027.
Investors have warned: a sustained drop in oil and gas prices depends on Tehran loosening its grip on a critical export route – the Strait of Hormuz – after a two-week truce.
Avoid turning the energy crisis into a budget crisis
Several EU countries, including Italy, Poland and Spain, have introduced measures such as fuel tax cuts to protect industry and citizens from high energy prices.
In this regard, Dombrovskis warned: EU countries should not turn an energy crisis into a fiscal crisis because of overspending. “We have less space for fiscal maneuvering than before,” Dombrovskis said in an interview. – “So we need measures with temporary and targeted action and low impact on the budget.
In June, the Commission will assess whether countries are on track to meet debt and deficit reduction targets and whether to launch so-called “excessive deficit procedures” against countries that have not reduced their deficits to agreed levels.
Excessive deficit procedures stigmatize a country’s economy and can end in sanctions from the EU. Italy had hoped to get out of it this year, but two EU officials have warned that is now unlikely. Italy’s statistics agency recently reported that the country’s deficit amounted to 3.1 percent of GDP last year – above the EU’s “below 3 percent” requirement.
Since the start of the Iran war, Rome has been demanding that Brussels temporarily suspend budget rules through a “common rescue clause.” It was activated during the COVID-19 pandemic to allow governments to spend money to get out of the crisis.
However, Dombrovskis said, “A general saving clause exists to overcome a serious economic downturn in the EU or the eurozone… This is not our case now.”
