Key insights
- The European Commissioner warns of potential stagflation in the EU due to rising energy prices stemming from the U.S.-Israeli war on Iran. Slower EU growth and higher inflation could negatively impact US equities through reduced demand and increased global economic uncertainty, potentially leading to risk-off sentiment.
BRUSSELS, March 27 (Reuters) - The European Union economy is at risk of stagflation as a result of the surge in energy prices caused by the U.S.-Israeli war on Iran, European Economic Commissioner Valdis Dombrovskis said.
"The outlook is clouded by profound uncertainty, but it is clear that we are at the risk of a stagflationary shock, that is to say, a situation where a slower growth coincides with a higher inflation," Dombrovskis told a news conference after a meeting of EU finance ministers.
"This is the case even if the disruptions in energy supplies were to be relatively short-lived. In such a scenario, our analysis suggests that the EU growth in 2026 could be around 0.4 percentage points lower than projected in our autumn economic forecast, and inflation could be up to one percentage point higher," he said.
"If disruptions prove more substantial and longer lasting, the negative consequences for growth would be even greater. Growth could be up to 0.6 percentage points lower in both 2026 and 2027," he said.
He said it was now clear that the scale, severity and impact of the war had increased since EU finance ministers last met a little over two weeks earlier.