BRUSSELS, March 27 (Xinhua) -- The European Union is facing the risk of a stagflationary shock as the ongoing conflict in the Middle East drives up energy prices and clouds the economic outlook, European Commissioner for Economy Valdis Dombrovskis said on Friday.
Speaking at a press conference following a virtual Eurogroup meeting, Dombrovskis said the conflict has intensified in recent weeks pushing energy prices sharply higher.
On Feb. 28, Israel and the United States launched joint attacks on Tehran and several other Iranian cities, killing Iran's then-Supreme Leader Ali Khamenei, along with senior military commanders and civilians. Iran responded by launching waves of missile and drone strikes targeting Israel and U.S. bases and assets in the Middle East.
The Strait of Hormuz, a strategic chokepoint through which roughly one-fifth of the world's oil passes, has been effectively closed. Brent crude has traded above 100 U.S. dollars per barrel for two consecutive weeks, he noted.
"The outlook is clouded by profound uncertainty, but it is clear that we are at risk of a stagflationary shock," Dombrovskis said, referring to a scenario where slower growth coincides with higher inflation.
He said that even if disruptions to energy supplies prove relatively short-lived, EU economic growth in 2026 could be about 0.4 percentage points lower than projected in the Commission's autumn economic forecast, while inflation could rise by up to 1 percentage point.
If disruptions are more severe and prolonged, growth in both 2026 and 2027 could be up to 0.6 percentage points lower, he added.
On policy responses, he said EU leaders had called on the European Commission to prepare a toolbox of targeted and temporary measures to address rising energy prices.
These measures include proposals to lower electricity taxation, improve the efficiency of grid infrastructure, and modernize the EU Emissions Trading System to reduce price volatility.
The Commission is also ready to work closely with member states to design national-level measures to mitigate the impact on households and businesses, he said.
Dombrovskis stressed that any policy response should be targeted, temporary, and consistent with the bloc's long-term decarbonization goals, while avoiding an increase in overall demand for oil and gas.
"Our first priority now must be to put in place a coherent set of policy measures that address the spikes in the prices of imported fossil fuels and that are consistent with our goal to reduce reliance on such fuels," he said.
He also acknowledged that governments have limited fiscal space due to previous economic shocks and increased defense spending needs.
Dombrovskis added that the EU is coordinating closely with international partners and that he would participate in a joint meeting of G7 finance and energy ministers on Monday to discuss the global impact and policy responses.
