Eurozone finance ministers and central bankers said on Friday that the Middle East crisis requires targeted and temporary support for households and businesses, rejecting broad fiscal intervention as a new energy shock increases pressure on growth, inflation and public finances across Europe.
The message from the Eurogroup meeting in Nicosia reflected growing concern that the economic fallout from the conflict could prove more persistent than initially expected, with officials warning that disruption in energy markets is already affecting households, businesses and government budgets.
European Commissioner for Economy Valdis Dombrovskis said the latest developments had significantly altered the EU’s economic outlook.
“The conflict in the Middle East has caused a new energy shock affecting inflation, growth and public finances across the EU,” he said.
According to the European Commission’s Spring Economic Forecast, inflation in the EU is expected to rise to 3.1% this year before easing to 2.4% in 2027. Economic growth is projected at 1.1% in 2026 and 1.4% next year.
Fiscal pressure is also expected to intensify. Average government deficits in the EU are forecast to rise from 3.1% of GDP in 2025 to 3.5% this year and 3.6% in 2027, while the number of member states exceeding the 3% deficit threshold is expected to increase from ten to thirteen.
Despite the weaker outlook, officials repeatedly sought to distinguish the current situation from the more severe energy crisis that followed Russia’s invasion of Ukraine in 2022.
Eurogroup President Kyriakos Pierrakakis said updated forecasts continued to point to resilience rather than recession in the eurozone economy. “We are clearly far away from a recession scenario,” he said.
Pierrakakis warned, however, that developments around the Strait of Hormuz had created wider risks extending beyond oil and gas supplies to strategic products and supply chains.
The disruption concerned “not only oil and gas flows but also strategic products such as fertilisers”, he said, referring to broader risks for European industrial activity.
Inflation could last longer
European Central Bank President Christine Lagarde said the impact of the crisis could continue even if geopolitical tensions eased.
Asked whether inflationary pressure would disappear if the crisis ended soon, Lagarde said delayed effects would continue to feed through the economy.
“Even if the crisis were resolved now, there would be delayed effects that would continue to emerge,” she said.
She added that even if inflation eventually eased, consumers should not expect prices to return to previous levels.
“It is likely that price levels will be higher at the end of this crisis,” Lagarde said.
Lagarde repeated that the ECB would remain focused on returning inflation to its 2% medium-term target and signalled that policymakers remained alert to second-round effects, including wage and pricing developments, as well as whether inflation expectations remain anchored.
She gave no indication on the ECB’s June 11 meeting, saying only that interest rate decisions would continue to be data-dependent and taken meeting by meeting.
No appetite for broad fiscal support
A second key theme in the discussions was the growing consensus against large-scale fiscal intervention, despite pressure from some member states for greater flexibility.
Questions during the press conference focused on calls by the Italian Government for more fiscal space under EU rules to address the effects of the crisis.
Dombrovskis acknowledged that discussions on possible policy options and flexibility were continuing, but said there appeared to be broad agreement against generalised support measures.
“Italy is perhaps the country raising the issue most systematically,” he said, adding that most member states supported a more targeted approach.
Asked whether special European financial support was being considered for countries more heavily affected by the crisis, including Cyprus, Dombrovskis said the response should, at this stage, remain “focused” and make use of existing EU funding tools.
He said the EU already had available funding instruments through RepowerEU and the Recovery and Resilience Facility, both designed to address energy issues and still containing significant unimplemented investment plans.
He added that as the Recovery and Resilience Facility enters its final implementation phase, significant funds would continue to be disbursed to member states, while absorption of cohesion funding under the multiannual financial framework was also increasing.
“It is possible, at least at this stage, to address these pressures through existing funding efforts,” he said.
Pierrakakis said fiscal and monetary policy must remain aligned.
“We all understand that we should not act counterproductively,” he said. “Fiscal policy and monetary policy must move together.”
Lagarde echoed the same message, saying support measures should comply with what she described as the “Triple T” principles: temporary, targeted and tailored.
She added that broader interventions could ultimately lead to a different monetary policy response from the ECB.
Pierrakakis said the lessons of the 2022 crisis had already shaped the current approach, noting that measures implemented since then had reduced the economic impact of energy shocks by around 12%.
“We are trying to be surgically precise and optimal in the way we respond to the crisis,” he said.
Long-term weaknesses return to focus
Beyond the immediate shock, officials also pointed to structural weaknesses in the European economy.
European Stability Mechanism Managing Director Pierre Gramegna said markets had revised growth expectations downwards and inflation forecasts upwards, but stressed that the region remained more resilient than it was four years ago.
He warned, however, that Europe faces additional pressure, including higher borrowing costs, weaker purchasing power and a widening gap with the United States economy.
“There is a clear need to strengthen investment and innovation,” Gramegna said.
Ministers also discussed longer-term issues, including housing affordability and the digital euro. Pierrakakis said there was broad agreement on continuing coordination on housing despite national differences, and expressed optimism that legislation on the digital euro could be completed by the end of the year.
Source: CNA
