The European Union is expected to downgrade its economic growth forecasts as rising energy prices linked to tensions in the Middle East push the bloc toward stagflation, officials warned, raising concerns over political stability across the region.
European Economy Commissioner Valdis Dombrovskis said the combination of slowing growth and rising inflation would likely force a revision of projections in the coming weeks.
“We are facing stagflation,” Dombrovskis said on the sidelines of the Delphi Economic Forum, pointing to the dual pressures of weak economic activity and surging prices. “It is almost certain that we will have to lower our economic forecasts.”
The economic shock has been driven in part by disruptions to global oil supplies following escalating tensions between the United States and Iran, which have affected shipping through the Strait of Hormuz — a critical artery for global energy flows.
Oil prices have remained above US$100 per barrel, feeding into higher energy costs across Europe and pushing up prices for transport, food and housing.
Europe’s largest economies are already feeling the strain. Both Germany and Italy have revised down their national growth forecasts, signalling broader weakness within the bloc.
Officials warn that the impact may not be short-lived. “The continued closure of the Strait of Hormuz makes its effects more pronounced,” Dombrovskis said, adding that the shock risks spreading further into the wider economy.
Political risks rise
Beyond the economic impact, the crisis is fuelling fears of political instability, as rising living costs place additional pressure on households and governments.
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Analysts say prolonged high energy prices could erode support for mainstream parties and strengthen populist and far-right movements across Europe.
In France, attention is already turning to upcoming elections, where the far-right National Rally could make significant gains. Elsewhere, political tensions are also building.
In Bulgaria, recent developments have raised concerns among European officials, while in Romania, a fragile coalition government faces mounting pressure. In Germany, the far-right Alternative for Germany party is seeking to expand its influence in upcoming regional elections.
Seamus Boland warned that rising costs are already affecting households. “Energy costs are passing into food, transport, and housing prices,” he said, adding that lower- and middle-income groups are the hardest hit.
Such pressures risk undermining trust in both national governments and European institutions, potentially accelerating support for more inward-looking policies.
Limited fiscal room
EU finance officials are now scrambling to respond to the crisis while avoiding a new debt surge.
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Meetings among member states in Athens and upcoming talks in Brussels are expected to focus on measures to cushion the impact, including targeted subsidies, tax reductions and support for vulnerable households.
However, policymakers face tight constraints after years of heavy spending during the COVID-19 pandemic and the energy crisis that followed Russia’s invasion of Ukraine in 2022.
“We recommend temporary and targeted measures,” Dombrovskis said, warning that fiscal space has become increasingly limited.
The الأزمة is also reopening divisions within the bloc, with northern countries pushing for spending restraint while southern members call for greater financial support.
Negotiations over the EU’s long-term budget are already proving contentious, particularly as the bloc prepares to begin repaying joint debt issued during the pandemic — estimated at around €25 billion annually from 2028.
Calls for reform
Some European leaders argue that the crisis underscores the need for deeper structural reforms and stronger economic coordination.
French President Emmanuel Macron has urged Europe to respond decisively to mounting global pressures, warning that the continent risks falling behind major powers if it fails to act.
As the EU prepares to update its economic outlook, the combination of geopolitical uncertainty, high energy costs and political fragility is expected to dominate discussions.
For now, officials say the outlook remains highly uncertain, with the trajectory of the crisis — and its impact on Europe’s economy — closely tied to developments in global energy markets and international relations.
