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

According to media reports, as the Iran war drove energy prices sharply higher, EU officials urged governments in member states not to take excessive support measures, so as to prevent the energy crisis from evolving into a fiscal crisis.

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

“This is a Commission-wide action,” Dan Jorgensen, the EU Commissioner for Energy, said. “What happens in one area of the economy can spill over to 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 individual countries have greater room for policy maneuver.

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

Since the U.S. and Israel launched the 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 has brought tremendous risks, which could lead to stronger inflation and trigger a range of negative effects.”

Informed officials said that the European Commission is urging countries to remain “coordinated and cautious” when introducing measures to ease energy price pressures.

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 2022 Russia-Ukraine conflict; both crises prompted European countries to roll out large-scale stimulus plans, thereby driving up national debt.

Based on 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 help cushion the shock by reducing energy demand and compensating low-income households.” But she also warned that “broad-based measures without a time limit” could backfire because they may “overstimulate” demand and push up inflation.

Lagarde urged policymakers to adopt “temporary, targeted, and tailored” measures.

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

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

（Source: Caixin Finance and News）