Meeting in the ‘enlarged Eurogroup’ format in a videoconference on Friday 27 March, the European finance ministers discussed the macroeconomic impact on the European Union of the war unleashed by the United States and Israel against Iran.
In the interests of coordination, they felt that emergency measures taken by Member States to support households and businesses should be temporary, targeted and in line with the long-term objective of decarbonising the economy.
The effects of the war in the Middle East are “beginning to pass to real economy, in operating costs of companies and energy bills for households”, declared the President of the Eurogroup, Kyriakos Pierrakakis, at the end of the meeting. Such a situation “creates inflationary pressures and lowers growth across Europe”, he added.
Despite the uncertainty over the duration and intensity of the economic crisis, the European Commissioner for Economic Affairs, Valdis Dombrovskis, has been able to put a figure on the economic impact for the EU.
“We’re at the risk of stagflationary shock, that is to say where a slower growth coincides with higher inflation”, he noted. He presented a scenario drawn up by the European Commission according to which, if the war ended quickly, growth in 2026 would be “0.4% of GDP lower” than the autumn economic forecasts (1.2% of GDP for the euro area, 1.4% for the EU, see EUROPE 13753/12). If the war continues, growth will slow to “0.6% of GDP in 2026 and 2027”.
Pierre Gramegna, Executive Director of the European Stability Mechanism (ESM), speaking on the basis of discussions with financial players, said that “even if the conflict were to end tomorrow”, its macroeconomic consequences would be felt at least through 2026, with high energy prices and renewed inflation, “GDP growth of less than 1% for the euro area” and higher borrowing costs for Member States.
Despite the dark clouds gathering, the conditions are not ripe to trigger the general escape clause of the Stability and Growth Pact, as was the case during the Covid-19 pandemic in 2021. “Analyses show we’re not there: slowdown is not a severe downturn”, argued Mr Dombrovskis.
Calibration of emergency measures. To tackle the coming crisis, several Member States, such as Spain (see EUROPE 13833/1), have adopted measures whose scale depends on the budgetary room for manoeuvre available to them.
Considering that the EU was “better prepared” for the inflationary shock of 2022 caused by Russia’s military aggression against Ukraine, thanks in particular to a reduction in its dependence on fossil fuels, Mr Pierrakakis listed criteria to guide Member States in drawing up appropriate budgetary measures.
“These measures should be targeted, fair and effective, with priority given to the most vulnerable households and businesses. They must be implemented swiftly but also remain temporary so as to address the crisis without creating new, larger problems in the future”, he detailed. He also stressed the importance of keeping in mind “the energy transition and energy independence”, two of the EU’s strategic objectives.
In line with the European Council's request (see EUROPE 13832/1), the Commission will make “proposals to mandate lower tax rates on electricity” so that these rates are lower than the taxation of fossil fuels, indicated Mr Dombrovskis. The ‘ETS’ system for trading greenhouse gas emission allowances will also be “modernised” to review the trajectory for the withdrawal of free allowances and to strengthen the power of the market stability reserve.
The European Commission rightly mentioned that countries such as “Spain and Portugal” are less affected by the crisis because they have significantly increased their production of renewable energy, noted Mr Gramegna.
There is little doubt that the fiscal measures taken by euro area countries in response to the crisis will have an expansionary effect on the euro area’s fiscal stance, which was expected to be neutral in 2026.
The G7 Finance and Energy Ministers will meet on Monday 30 March at the invitation of the French Presidency. (Original version in French by Mathieu Bion)