European finance ministers warned on Thursday that the European economy faces the risk of stagflation due to the ongoing rise in energy prices associated with the Iranian war. This statement was made during an informal meeting in Nicosia, where the head of the Eurogroup, Kyriakos Pierrakakis, affirmed that "there are stagflationary pressures, but Europe is capable of withstanding them."
The European Commission predicts that growth in the Eurozone economy will slow to 0.9% in 2026, down from 1.3% in 2025, while inflation is expected to rise to 3% compared to 1.9%, significantly exceeding the European Central Bank's target of 2%.
Details of the Event
Reports indicate that the repercussions of the war in the Middle East may worsen depending on its duration and intensity. In this context, investors have expressed increasing concerns that the war in Iran could lead to a prolonged inflationary shock, pushing government bond yields to record levels and straining the purchasing power of governments, businesses, and households.
Pierrakakis stated, "We have witnessed clear fluctuations in bond markets, and we are striving to balance support for citizens on one hand and preventing the energy shock from turning into a financial crisis on the other." The European Commission has urged governments to adopt "targeted and temporary" financial support measures focused on the most affected groups.
Background & Context
These warnings come at a time when many European countries are struggling with rising energy costs, negatively impacting economic growth. Some countries have resorted to public measures such as fuel tax cuts, which benefit all segments without direct targeting. In this regard, European Economic Commissioner Valdis Dombrovskis stated that "the political response should focus on temporary and targeted measures, avoiding support for fossil fuel demand given the limited fiscal space."
The Commission also expects the budget deficit in the Eurozone to rise to 3.5% of GDP in 2026, up from 2.9% in 2025, exceeding the European maximum limit of 3%. Public debt is also expected to increase to 91.2% in 2027 compared to 88.7% in 2025.
Impact & Consequences
Some countries, such as Italy, are seeking to exclude fuel price support from deficit calculations, similar to defense spending; however, the Commission and most finance ministers oppose this approach. Belgian Finance Minister Vincent Van Peteghem expressed concern about expanding exemptions, noting that "broadening exemptions in general is complex, as we are facing a supply shock rather than a demand shock."
Concerns are growing that stagflation could exacerbate financial conditions in European countries, potentially affecting economic stability in the region. Under these circumstances, European governments must take decisive steps to avoid worsening the financial crisis.
Regional Significance
Arab countries are also affected by the economic conditions in Europe, especially those reliant on energy exports. Rising energy prices could increase economic pressures on oil and gas-importing countries, necessitating appropriate economic measures to mitigate the impacts of these changes.
In conclusion, the current situation in Europe requires concerted efforts among European countries to avoid exacerbating economic crises, while also considering the potential impacts on Arab countries whose economies are closely linked to European markets.