Energy crisis pushes EU towards stagflation

The European Union’s economy faces the risk of stagflation as energy prices surge in connection with the war in Iran. The warning was issued by Valdis Dombrovskis, the European Commissioner for Economic Affairs, after a meeting of EU finance ministers. He said the bloc could face a situation in which economic growth slows while inflation accelerates.

‘This is the case even if energy supply disruptions are relatively short-lived. In such a scenario, our analysis suggests that European Union 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.

In the event of prolonged disruption, the negative impact could be more pronounced, with growth falling by as much as 0.6 percentage points in 2026 and 2027.

Finance ministers agreed that measures to mitigate the impact of high energy prices must be targeted, swift and temporary, with a particular focus on protecting the most vulnerable households and businesses.

At the same time, Dombrovskis noted that member states’ fiscal space is constrained by previous crises and rising defence spending. Discussions on a co-ordinated response will continue at the G7 finance and energy ministers’ meeting.

(reuters, max)