Europe’s economic managers have grown used to lurching from one shock to the next. But can the Union’s new fiscal rule-book agreed in 2024 can survive the latest jolt, a war-blocked Strait of Hormuz? Commissioner Valdis Dombrovskis discussed some ideas with MEPs on Thursday.
“The war in the Middle East has triggered one of the largest supply chain disruptions in the history of global energy market,” EU Economy Commissioner Valdis Dombrovskis warned members of the European Parliament’s Committee on Economic an Monetary Affairs (ECON) on 9 April. That sentence set the register for the next hour. MEPs probed whether the revised Stability and Growth Pact can marry energy relief, re-armament and debt control. The fiscal framework passed two years ago, but has yet to face a downturn test.
Mr Dombrovskis came armed with two numbers. If the ceasefire just negotiated holds, the Commission thinks European growth will slip by up to 0.4 percentage points this year and inflation will rise by one. If the rockets resume, the drag on growth could reach 0.6 points and price rises could climb another 1.5. “The European economy thus remains at the risk of stagflationary shock,” he told ECON Chair MEP Aurore Lalucq (S&D/FRA).
Stagflation fears
Ms Lalucq, who also chaired the debate opened the session with an unusual plea. Traders, she said, were again reading about crypto flows, oil jumps and stagflation on the front page of the Financial Times. They wanted something sturdier than headlines.
Yet the mood in the room was less panic than pre-emptive triage. Brent has drifted back below $100 a barrel since the truce, giving policymakers days rather than hours to design a response. The commissioner promised a “toolbox of targeted temporary measures” before leaders meet again.
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In Brussels jargon, toolbox means tax tweaks and tweaks mean electricity. One plank is to mandate lower levies on electrons than on molecules. Another is to stiffen the emissions-trading system’s market-stability reserve so speculators cannot yo-yo the carbon price during war scares.
More contentious is what capitals may do at home. In the last energy crunch governments spent about one per cent of GDP on untargeted price caps and fuel rebates. This time, insisted Mr Dombrovskis, subsidies must be short, focused and cheap. “First, as a framework is centered on the next expenditure benchmark, revenue shortfalls resulting from economic slowdown do not need to be compensated for,” he said.
Fiscal valves and principles
The commissioner reminded deputies that the new rules already let automatic stabilisers work. But his message was of the Bruce Springsteen variety: the door is open but the ride ain’t free. Ministers may slash VAT on diesel for a quarter, not a year, and only if the finance ministry can show the saving reaches hauliers rather than hedge funds.
High debt and high rates make that stance inevitable. Interest-service costs no longer hide at zero; they now carve visible chunks out of budgets. Hence the commissioner’s real novelty: guidance that any support “should not increase aggregate demand for oil and gas at the time when savings are needed”. In other words, handouts that blunt price signals will earn a rap on the knuckles.
The war in the Middle East has triggered one of the largest supply chain disruptions in the history of global energy market. — EU Economy Commissioner Valdis Dombrovskis
Spain, Portugal and others chafed. MEP Katarina Martins (The Left/PRT) pleaded for permission to copy Madrid’s VAT cuts. Mr Dombrovskis offered sympathy but wedged it between caveats. He repeated that national measures must stay temporary, must target vulnerable households, and must avoid widening deficits for good. The ceasefire’s fortnight window gives such principles a test run. If shooting restarts, politics may trump purity.
Competitiveness and simplification
A lasting fix, the commissioner argued, lies elsewhere. “This is the only real solution to permanently protect European economy from from volatility of fossil fuel prices and supply conditions.” Faster decarbonisation—more grids, more heat-pumps—will stop wars in Hormuz dictating food prices in Lisbon. Green MEPs nodded; conservatives warned against squeezing firms already drowning in red tape.
That gripe steered debate to Europe’s productivity funk. The continent now grows near one per cent while America streaks ahead. Business-friendly legislators complained that every promise to cut bureaucracy spawns a fresh reporting template. Mr Dombrovskis pushed back. The Commission’s Competitiveness Compass, launched last year, sets a 25 per cent cut in administrative burden, he said. Omnibus bills could save firms €37.5bn a year once passed—but only three of ten have cleared both chambers.
Small and medium-sized firms, which shoulder 35 per cent of that burden, will see no relief until capitals hurry the other seven packages through. Here the commissioner was sharper: he hinted that complaints ring hollow when parliaments stall their own lifeboats. Still, he conceded ground. Reporting lines may shrink further if the next parliament keeps simplification on its agenda.
Windfall tax and no escape
MEP Anouk van Brug (Renew/NLD) pressed a different lever: could the crisis nudge Gulf states to invoice oil in euros? Mr Dombrovskis thinks so, but only if Europe tidies house first. A stronger currency demands deeper capital markets, swifter payments and a digital euro that cuts dependence on American rails. The Commission, the Council and the European Central Bank now share a mandate to draft that strategy. Deputy governors eyeing reserve-currency status may cheer; sceptics note that the savings union has been promised since 2015.
The most practical row concerned taxes on energy giants. Several governments want a fresh windfall levy; others fear scaring investment. The commissioner, more or less, washed his hands. “Strictly speaking, there is nothing preventing member states for applying this windfall profile tax because direct taxation is by and large within the competencies of member states,” he said. Coordination may follow if prices spike again, yet no one expects Brussels to propose EU-wide profit grabs while unanimity rules.
Strictly speaking, there is nothing preventing member states for applying this windfall profile tax because direct taxation is by and large within the competencies of member states. — Valdis Dombrovskis
Could the whole fiscal regime be suspended instead? Only if Europe tumbles into severe recession, he replied. Scenario analyses show a slowdown, not a slump, so the general escape clause of the Stability and Growth Pact remains shut. War-time ceilings may loosen a little, but they will not vanish. MEP Luděk Niedermayer (EPP/CZE) asked whether capitals were obeying the principles already. The Commission will judge in its spring European Semester, due in early June.
Room for manoeuvre
Is there any cash left? The tableau is tight. Defence outlays rise, automatic stabilisers hum and bond yields creep. Within that narrow corridor the commissioner still sees options. Automatic exclusions, such as interest payments, unemployment benefits, carve small pockets of space. Beyond that, governments may borrow political capital, not fiscal. The coming toolbox will tell how.
For now the game is to buy time. A two-week truce in the Gulf turns the Commission’s scenario into a range, not a forecast. Mid-May numbers will refresh the picture. ECON meets again on 14 April, though few expect revolutions so soon after today’s joust. Mr Dombrovskis closed with a sober pledge: the institution will keep watching, keep modelling, and keep the dialogue open.
How much relief this offers drivers facing €2.40 diesel—the way the Dutch did at the end of March—is a question. But Europe’s energy bills, the commissioner implied, leave no choice. The fiscal valves are narrow, the principles strict, and the politics, as usual, the real constraint.
