“The very existence of this G7 meeting in this phase, with all stakeholders and in particular the Americans … is in itself a notable and significant fact,” a French economy ministry official told reporters on Monday evening.
Brussels warned on Friday that the longer the crisis goes on, the more likely it is that the bloc will suffer a disastrous cocktail of stagnant economic growth and high inflation, or “stagflation.” The problem for decision-makers is that they have few levers to pull after the pandemic and Russian energy crisis left many EU governments, including France and Italy, carrying heavy debt.
Even Germany, the EU’s biggest economy, is under pressure after leading research institutes accused Berlin of using an infrastructure borrowing binge to plug budgetary gaps. That’s left many EU capitals with little financial firepower to counter another energy crisis, which has driven government borrowing costs up.
“If the Iran War develops into a major regional conflict it could place an even greater burden on Germany and Europe, as heavy as we recently experienced during the Covid pandemic or at the start of the Ukraine war,” German Chancellor Friedrich Merz said in Berlin at a separate joint press conference alongside Syrian President Ahmed al-Sharaa. “The best would be that this war concludes as quickly as possible.”
Limited options
The European Commission has pledged to unveil a toolkit of measures to help curb skyrocketing energy prices, such as boosting the bloc’s carbon market reserve and developing a €30 billion decarbonization fund. Brussels will also propose cutting taxes and reducing energy charges.
But the EU executive has repeatedly ruled out putting the EU’s limits on public spending on ice unless the economy falls off a cliff, recommending that governments instead focus on helping those in need in the short term.
Europe’s economic vulnerability has also put the European Central Bank in an awkward position. Its Governing Council meets in four weeks to decide whether it should raise interest rates to avoid a repeat of 2022, when rampant inflation caught the Bank off guard. Rate hikes drag on the economy, risking a recession.
“You have to think about a wider effect on the economy, and 2026 is not 2022: We don’t have the strong pandemic reopening effects, and the labor market is softer,” the ECB’s chief economist, Philip Lane, told Irish broadcaster RTE on Monday. “We will be looking at all of these considerations: no “paralysis,” but no kind of pre-emption either.”