European Union Economic Affairs Commissioner Valdis Dombrovskis has issued a warning that the conflict involving Iran is exerting stagflationary effects on the EU economy. He told reporters that rising energy prices are impacting every entity in the European economy, whether businesses or households, pushing the EU toward a path of weaker growth and higher inflation. Europe is confronting a stagflation shock, he stated.
Speaking alongside him in Brussels, Eurogroup President Kyriakos Pierrakakis attempted to appear composed about the situation. He remarked that the region is in a stagflationary trend, meaning growth expectations are being revised downward while inflation forecasts are being adjusted upward. However, he noted that a full-blown stagflation scenario has not yet materialized.
These comments follow recent remarks by European Central Bank President Christine Lagarde, who last week indicated that the term "stagflation" belongs to the 1970s and should not be applied to describe the current circumstances in the eurozone.
EU Climate Commissioner Wopke Hoekstra highlighted the challenges facing the region on Tuesday, emphasizing the need to fasten seatbelts and prepare for a situation that may persist or even deteriorate. He suggested that further turbulence is likely, and even under the most favorable conditions—if the conflict were to cease immediately—the repercussions would linger for weeks or months.
Slovenian official Klemen Bostjancic also expressed concern about stagflation, describing it as a threat that has not yet been reached. He stressed the importance of establishing sufficient fiscal space for countries, as reversing such a trend would require time and policy measures once it occurs.
Cypriot Finance Minister Makis Keravnos similarly cautioned that the situation is changing hourly, urging close monitoring and proactive measures to avoid falling into stagflation.
Bond traders are positioning for a stagflation outcome. Interest rate swaps tied to policy meeting dates now imply three 25-basis-point rate hikes this year, whereas before the conflict, markets had priced in only a small probability of rate cuts. Meanwhile, the long end of the yield curve—which typically sees stronger demand when growth prospects worsen—has outperformed the short end. This has narrowed the spread between 5-year and 30-year government bond yields to below 80 basis points, down from over 100 basis points in February.
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