With efforts to launch meaningful negotiations between the United States and Iran going nowhere, disruption in the Strait of Hormuz dragging on, Donald Trump insisting the ceasefire has not collapsed while simultaneously pledging to press ahead with “Operation Freedom in the Strait”, and Iran striking targets in the United Arab Emirates, anxiety over what comes next for EU economies has grown too deep to be soothed by even Christine Lagarde’s half-comforting reassurances.
The problem facing Europe is not what label we choose to slap on this crisis now baring its teeth — once again with energy at its core. The problem is the crisis itself.
And with every extra day the war drags on, more people — leaders, politicians, economists, business figures, analysts — are warning that it is getting worse. They are also warning that any return to normality, whenever or however the warring sides finally shake hands — assuming they ever do — will not happen overnight. It will take time.
On 30 April, European Central Bank president Christine Lagarde argued that what Europe faces is not stagflation — the very word that sends a chill through European economies — but something bad that nevertheless does not qualify as stagflation.
Not because inflation is low. Quite the opposite. Europeans have been carrying soaring prices on their backs since 2020-21, and now another wave is crashing in. Nor because growth is healthy. It isn’t. In several EU countries it is weak to non-existent, and hopes of recovery remain painfully thin — including in Germany.
According to Lagarde, one ingredient is still missing before the situation can truly be called stagflation: high unemployment.
But if weak growth and relentless price rises continue, how long before unemployment joins the party too?
The answer to Lagarde — or perhaps the public undermining of her position — came yesterday from EU economy commissioner Valdis Dombrovskis, who spoke openly about stagflation.
“Higher energy prices affect every part of the European economy, both businesses and households. They are pushing the EU economy towards weaker growth and higher inflation,” Dombrovskis said, before spelling it out even more bluntly: “Europe is facing a stagflationary shock.”
The commissioner also touched on another issue already causing deep concern inside both the Commission and the Council — and one recently raised in Cyprus by the German chancellor himself.
“Our room for manoeuvre is already far more limited today because of higher deficits and debt levels, a higher interest-rate environment, and the urgent need for additional defence spending,” Dombrovskis warned. “We simply cannot repeat the mistakes of the past.”
He may well have been referring to the hundreds of billions — roughly €350 billion — the EU handed out in grants, mainly through the Recovery Fund, along with almost as much again in cheap loans, in an effort to keep European economies productive and at least somewhat competitive.
A policy that Ursula von der Leyen has already made clear will not be repeated or extended — even as leaders of powerful member states, including Emmanuel Macron, continue pushing for it.
It is worth recalling what German chancellor Friedrich Merz said while arriving at the informal summit in Ayia Napa: “From Germany’s perspective, increasing debt is out of the question, and European bonds on the capital markets are also out of the question. This is not a position Germany shares, as my colleagues know. Europe must manage with the money we already have — and that means setting new priorities.”
All of which may point to one uncomfortable conclusion: if this crisis deepens and its teeth sink in harder, hopes for another round of EU-wide economic support — whether through grants or cheap loans — are slim.
After that, Europe will be left relying on whatever fiscal “cushions” remain — the shrinking room for manoeuvre Dombrovskis referred to.
And when even those run out, what follows is obvious: cuts.
