EU warns it remains exposed to stagflation risk despite US-Iran ceasefire.

The warning came even as the United States and Iran agreed to a two-week ceasefire and oil prices fell below $100 per barrel. The European Commission is preparing to cut its regional growth forecast for this year, citing uncertainty tied to the Gulf conflict, according to the Financial Times.

EU growth and inflation outlook under revised scenarios

Valdis Dombrovskis, the EU Commissioner for Economy, said the ceasefire is a welcome step toward easing tensions, but the economic impact of the Iran conflict remains highly uncertain. He described the situation as a “stagflation shock” for the EU.

Before the conflict began, the European Commission projected EU economic growth of 1.4% in 2026 and 1.5% in 2027, with annual inflation just above 2% in both this year and the next.

In its latest scenarios, the Commission estimates that EU GDP growth could be reduced by up to 0.4 percentage points in this year if energy prices return to pre-war levels before the end of 2026. If energy prices take longer to revert, growth could fall by up to 0.6 percentage points in both this year and next.

Inflation is also projected to rise by up to 1 percentage point in 2026 under the first scenario, and by up to 1.5 percentage points in both 2026 and 2027 under the second scenario.

The Commission is expected to release its updated GDP growth forecast in May.

Shipping disruption and oil price sensitivity

Analysts cited by the Financial Times said the near-term path for oil and gas prices will depend on whether Tehran loosens control over shipping through the Hormuz Strait after the two-week ceasefire expires.

The Financial Times reported that Iran will require shipping companies to pay tolls through the strait using cryptocurrency for oil ships crossing Hormuz during the ceasefire. One day after the ceasefire was announced, the Hormuz Strait remained blocked by Iran.

Satellite images from shipping data firms, as reported by the Financial Times, showed that since the U.S.-Iran ceasefire was announced, only one tanker and five dry cargo ships have passed through Hormuz. A route that normally sees about 140 ships per day was therefore operating far below usual levels.

Member-state measures and EU fiscal constraints

Some EU member states, including Italy, Poland, and Spain, have introduced measures such as fuel tax cuts to protect industries and households from higher energy prices.

Dombrovskis reiterated that member states should avoid overusing energy-shock countermeasures such as subsidies and fuel tax relief, warning that doing so could turn an energy crisis into a fiscal crisis. He said the EU has less fiscal space than before and should rely on temporary, targeted measures with limited fiscal impact.

Debt and deficit enforcement in focus

In June, the European Commission will assess whether member states are on track to meet debt reduction and budget deficit targets, and whether it needs to push for enforcement of deficit-reduction measures for countries that miss the cap. EU procedures for excessive deficits may include financial penalties.

Until recently, Italy had hoped to avoid such procedures this year. However, EU officials warned that this may not happen after Italy’s deficit reached 3.1% of GDP last year, above the EU requirement of below 3%.

Since the start of the Iran conflict, Italy has urged Brussels to temporarily suspend EU fiscal rules using the “general escape clause”, which was activated during the Covid-19 pandemic to allow governments to increase spending. Dombrovskis said the mechanism applies only to addressing a severe recession in the EU or euro area, and that the EU is not currently in such a situation.