The European Union will almost certainly downgrade its full-year economic forecasts as the ongoing “Iran war” and the closure of the Strait of Hormuz plunge the bloc into stagflation, threatening to ignite severe political crises across the continent, according to the European Commissioner for the Economy.
The economic shock stems from a continued standoff between Washington and Tehran, following the last-minute cancellation of negotiations involving US President Donald Trump and Iran. With the Strait of Hormuz remaining closed to most commercial shipping, oil prices have been sustained above $100 a barrel.
The resulting surge in energy prices is colliding with weakening economic growth across the bloc, creating a period of stagflation that European officials fear will erode the fragile political centre and empower far-right and populist movements.
“We are facing stagflation, an economic slowdown and a rise in inflation at the same time,” European Commissioner for the Economy Valdis Dombrovskis told Politico on the sidelines of the Delphi Economic Forum in Greece. “It is almost certain that we will have to lower our economic forecasts for the full year in the spring forecasts in the second half of May.”
Germany and Italy, which together account for more than a third of the European Union’s gross domestic product, have already downgraded their full-year economic forecasts in recent days.
Speaking on the wider impact of the geopolitical conflict, Dombrovskis noted that the crisis is no longer viewed as temporary. “The continued closure of the Strait of Hormuz makes its effects more pronounced, and even leads, according to some, to their spread into the wider economy,” he said.
Political Shifts and Populist Surge
Across Europe, unpopular governments are bracing for a populist backlash that political magazine Politico reports could culminate next year in France. The crisis threatens to propel the far-right National Rally to victory, placing them in the Elysée Palace—an outcome that would carry global repercussions.
While France remains the most significant prize, it is not the only indicator of a deteriorating political centre. In Bulgaria, the victory of former pro-Kremlin President Rumen Radev on April 20 has already raised alarms among established European governments. In Romania, an ongoing coalition crisis threatens to oust pro-EU Prime Minister Ilie Bolojan from power. Meanwhile, in Germany, the far-right Alternative for Germany (AfD) party is seeking further gains in the Saxony-Anhalt state elections scheduled for September, having already expanded its reach into western parts of the country far from its traditional eastern strongholds.
Seamus Boland, head of the European Economic and Social Committee, which advises the European Commission on economic and labour policies, warned of the societal toll.
“Energy costs are passing into food, transport, and housing prices, and low- and middle-income households are the most affected,” Boland said. “Politically, this creates a space for distrust, not only in national governments, but also in the ability of European institutions to protect citizens from external shocks. This carries the risk of accelerating support for a more protectionist or inward-looking approach.”
Stagflation and Economic Alert
The Iran crisis is the latest catalyst for Europe’s high economic alert, though warnings have circulated for years. In 2024, former European Central Bank President Mario Draghi cautioned that Europe faced a “slow agony” unless leaders implemented sweeping reforms to keep pace with faster-growing economies in the United States and China.
French President Emmanuel Macron echoed this urgency following talks with Greek Prime Minister Kyriakos Mitsotakis in Athens on Friday.
“We should not underestimate that this is a unique moment in which an American president, a Russian president, and a Chinese president are all against the Europeans,” Macron said. “It is the right moment for us to wake up.”
To address the immediate fallout, deputy finance ministers from the 27 EU member states are gathering in Athens on Monday to discuss strategies for mitigating the economic impact without triggering a debt crisis, according to European diplomats. Finance ministers will subsequently take up the discussions next week in Brussels as national treasuries begin the difficult task of drafting budgets for the coming year.
During a two-day summit in Cyprus last week, which coincided with the meetings in Greece, EU leaders reviewed European Commission proposals to ease the energy crisis. Suggested measures included cutting electricity taxes, reducingvalue-added tax (VAT), launching social programmes to support vulnerable households, providing targeted subsidies for clean technologies, investing in energy grids, and coordinating the replenishment of gas reserves.
Fiscal Constraints and North-South Divide
Despite these proposals, the capacity of Brussels and heavily indebted national governments to intervene remains severely constrained. Many EU nations are still grappling with high debt levels and deficits accumulated during the COVID-19 pandemic, leaving narrow margins for the type of massive economic interventions deployed during the pandemic or following the 2022 Russian invasion of Ukraine.
“We recommend adhering to temporary and targeted measures to limit their financial impact, because fiscal space has become more limited since the coronavirus pandemic, and since the first energy crisis caused by the Russian invasion of Ukraine in 2022,” Dombrovskis said.
The deteriorating economic landscape is reopening historical divisions within the bloc, pitting fiscally conservative Northern European countries against Southern nations demanding greater financial support from Brussels.
Negotiations over the EU’s €1.8 trillion budget for the 2028–2034 period have devolved into a battleground. Northern states are pushing to curb spending and direct more funds toward defence, while Southern states maintain their urgent need for economic backing.
Further compounding the pressure, the EU is scheduled to begin repaying approximately €25 billion annually from 2028 to clear the joint debt issued to counter the economic impact of the pandemic.
During their meeting in Athens, Macron and Mitsotakis called for an extended repayment period for the post-pandemic recovery plan and advocated for the issuance of additional European debt to fund the bloc’s investment priorities.
“We borrowed during the COVID pandemic. Today, some tell us that we must repay quickly,” Macron stated on Friday. “This is ridiculous.”
