EU warns energy shock could trigger a fiscal crisis

European Union officials are urging member governments to curb excessive support measures in response to high energy prices, warning that the energy shock linked to the US-Iran conflict could become a fiscal crisis across the region.

EU calls for limits on subsidies and emergency measures

In discussions with member states, the European Commission urged that energy subsidies, tax cuts and price caps be limited in time and scope, according to a source familiar with the talks cited by the Financial Times. Officials said the warnings reflect lessons from the 2022 energy crisis, which contributed to rising inflation and larger budget deficits.

EU Energy Commissioner Dan Jorgensen said the issue requires coordination across policy areas. “This is a joint effort of the entire Commission. What happens in one field of the economy can spill over to society at large,” he said.

The Commission also emphasized that it is providing “technical guidance and helping countries shape policy tools they want to use within the fiscal framework they have,” Jorgensen said.

What member states are doing

Some countries have already moved to reduce costs for consumers. Italy, Poland and Spain have cut fuel taxes, while other governments have called for relaxing EU rules on state aid.

Italy is also pushing Brussels to ease macro-financial constraints to create more room for governments to respond to energy price shocks.

Energy price pressure and inflation risks

The US-Iran war has driven oil and gas prices in Europe up by about 60%, raising concerns about diesel shortages and aircraft fuel. Jorgensen said the conflict “risks higher inflation with all the negative impacts that come with it.”

EU officials also warned that the current Gulf conflict could trigger a third economic crisis in the EU within six years, following the Covid-19 pandemic and the Russia-Ukraine war that began in 2022. They said the previous crises led to large-scale stimulus programs that increased public debt.

Public debt and policy constraints

The overall public debt ratio of EU member governments rose from 77.8% of GDP at the end of 2019 to 82.1% in Q3 2025.

In remarks in March, European Central Bank President Christine Lagarde said targeted government policies could help cushion the energy shock by reducing energy demand and offsetting costs for households with low incomes. She warned that broad and unlimited measures could backfire by boosting demand and pushing inflation higher, urging policymakers to focus on “temporary, targeted and finely-tuned” actions.

EU Economic Commissioner Valdis Dombrovskis told finance ministers that only short-term and “consistent” emergency measures should be used. He warned that excessive spending would have serious fiscal consequences, citing reduced fiscal space after the Covid-19 and Ukraine crises and increased defense spending since 2022.

Deficit rule pressure and windfall tax proposals

Italian Finance Minister Giancarlo Giorgetti said Brussels would find it difficult to avoid loosening the EU’s deficit limit rules set at 3% of GDP. “Clearly, unless the situation changes, EU-level discussions on this issue are unavoidable,” he said.

Last week, finance ministers of Germany, Spain, Italy, Portugal and Austria called on Brussels to impose windfall taxes across the EU on energy companies to relieve “the burden on the European economy and European citizens.”

Poland has cut VAT and excise taxes on fuel, which the government said will reduce budget revenue by 1.6 billion zlotys (370 million euros) per month from these taxes. It plans to offset the shortfall with a windfall tax on energy companies, though details of the new tax have not been announced.

Compliance with EU rules and the green transition

While EU governments consider subsidies and other state aid measures to support affected industries, officials warned that measures must still comply with EU rules aimed at supporting the green economy and reducing dependence on fossil fuels.

Jorgensen said that in a crisis, governments may need to subsidize and support measures they would not normally consider, but warned that without action “people will have no energy and production will grind to a halt.”