Iran war pushes up energy prices; EU warns member states: excessive subsidies could trigger a fiscal crisis

Ask AI · How the Iran War sparked a chain reaction of EU fiscal crisis worries

China Financial News (Caixin) April 6 (Editor: Xia Junxiong) According to reports in the media, as the Iran War drives a surge in energy prices, EU officials are urging governments in member states not to take excessive support measures, so as to prevent the energy crisis from evolving into a fiscal crisis.

People involved in the discussions said that during consultations with member states, the European Commission has insisted that the proposed energy subsidies, tax cuts, and price-cap measures should be limited in terms of both time and scope. The EU is trying to avoid repeating what happened during the 2022 energy crisis, when the crisis pushed up inflation and led to a sharp surge in fiscal deficits.

“This is a unified action by the Commission,” said Dan Jorgensen, the EU Commissioner for Energy. “What happens in one area of the economy may spill over into society as a whole.”

Countries such as Italy, Poland, and Spain have already cut fuel taxes, while some other countries have called for loosening EU state aid rules. Italy has also pushed the EU to relax fiscal constraints so that countries have greater room for policy choices.

Jorgensen said the European Commission is providing countries with “technical advice and support to help them design the policy tools they need within their current fiscal space.”

Since the United States and Israel launched a war against Iran, European oil and gas prices have risen by about 60%, raising concerns about shortages of diesel and aviation fuel.

Jorgensen said the conflict “unfortunately brings enormous risks that could lead to stronger inflation and trigger a series of negative impacts.”

An informed official said the European Commission is urging countries to keep “coordination and caution” when introducing measures to ease energy price pressure.

Officials are concerned that the conflict could become the EU’s third economic crisis in six years. The previous two were the COVID-19 pandemic and the full outbreak of the Russia-Ukraine war in 2022. Those two crises prompted European countries to roll out large-scale stimulus plans, which in turn drove up national debt.

According to the latest data, the share of general government debt in the EU as a percentage of GDP has risen from 77.8% at the end of 2019 to 82.1% in the third quarter of last year.

Last month, ECB President Lagarde said: “Targeted government policies can alleviate shocks by reducing energy demand and compensating low-income households.” But she also warned that “broad and open-ended measures” could backfire, because they may “over-stimulate” demand and raise inflation.

Lagarde urged policymakers to take “temporary, targeted, and customized” measures.

The EU Commissioner for Economic Affairs, Dombrovskis, has told finance ministers of member states that only “coordinated and consistent” short-term emergency measures should be taken.

He warned that excessive spending would “bring serious fiscal impacts,” because the pandemic and the Ukraine crisis, as well as the surge in defense spending since 2022, have already significantly narrowed countries’ fiscal space.

(Caixin Finance) Xia Junxiong