Iran war pushes Europe toward stagflation as energy costs surge and growth slows

The war in Iran is damaging Europe’s economy, pushing it towards stagflation, the dangerous combination of stagnant growth and accelerating inflation.

The spike in oil prices caused by the conflict is hurting businesses across the European Union, fueling fears among managers and policymakers about the unfolding scenario.

Stagflation alarm bells are ringing in Europe

The war in the Persian Gulf, sparked by joint U.S. and Israeli strikes on Iran at the end of February, is already inflicting real economic damage on Europe, regional media revealed, quoting new data.

Amid rising energy prices that pushed input costs to their highest level in over three years, eurozone business activity slowed to its lowest level in almost a year in March.

According to S&P Global’s Flash Purchasing Managers’ (PMI) Index survey published Tuesday, overall activity in manufacturing and services fell to 50.5, from 51.9 the previous month.

The index is now much closer to the 50-point mark that separates growth from contraction, Euractiv reported.

Quoted by the European news website, Chief Business Economist at S&P Global Market Intelligence, Chris Williamson, commented:

“The flash Eurozone PMI is ringing stagflation alarm bells as the war in the Middle East drives prices sharply higher while stifling growth.”

The lowest figures registered in 10 months were mainly driven by slowing activity in Germany and France, the largest economies in the common currency area.

In both cases, input prices rose sharply, largely due to energy costs and disruptions in supply chains. Selling prices increased too, but not as significantly.

Energy prices surged after the Islamic Republic effectively closed the Strait of Hormuz, which accounts for roughly 20% of global oil and gas shipments.

Meanwhile, supplier delays reached their highest levels since August 2022, or a few months after Russia launched its full-scale invasion of Ukraine.

At the same time, expectations for future output saw their largest drop on record since the start of that war, Williamson pointed out.

According to the analysts at S&P Global, the latest data is consistent with the slowdown in the eurozone’s GDP growth rate to below 0.1% in the first quarter.

This sign of approaching stagnation comes amid indications that consumer price inflation may accelerate toward 3%, Euronews noted.

Last week, the European Central Bank (ECB) slashed its growth projection for the euro area, while hiking the inflation outlook for the whole year.

It also held rates at 2%, but it will have to be very careful with its future policy decisions as it’s likely to face a growing risk of stagflation in the next weeks and months.

Brussels delays proposal to ban Russian oil

High-ranking EU officials, including Economy Commissioner Valdis Dombrovskis, have expressed fears of stagflation similar to the one Europe went through during the two oil crises of the 1970s.

The head of the International Energy Agency, Fatih Birol, warned economic damage from the Iran war could be even greater than the combined impact of those shocks and Russia’s invasion of Ukraine.

Against this backdrop, this week the European Commission delayed a proposal to permanently ban imports of Russian oil and petroleum products into the EU.

Its energy policy spokesperson Anna-Kaisa Itkonen did not provide a new date, but told journalists the Commission remains “committed to making this proposal.”

Legislation cementing the prohibition was to be presented on April 15, but the executive body removed the publication date from its agenda on Tuesday.

The EC vowed to phase out Russian crude with a dedicated law in May 2025 but did not deliver the draft by the end of the year, as initially promised.

In December, the Commission announced that the proposal would be published in early 2026. However, only a few member states have so far filed the required national plans to diversify supplies.

The bill is part of the bloc’s REPowerEU roadmap, under which the EU has already banned imports of Russian gas, including LNG by the end of 2026 and pipeline gas by the fall of 2027.

While deliveries of Russian oil have already been restricted under EU sanctions, Hungary and Slovakia secured derogations using their veto power.

Unlike trade sanctions, which require the unanimous support of all 27 members, the legislative initiative would only need a qualified majority.

The two countries are now clashing with Brussels and Kyiv over the resumption of Russian oil transit through the Druzhba pipeline.

They are accusing Ukraine, which claims the Soviet-era pipe was damaged in a Russian drone strike, of deliberately delaying repairs, and are holding up a €90 billion loan for the invaded nation.

Thus, both wars near Europe are threatening to turn off the oil taps for the EU, as recently reported by Cryptopolitan, and pushing fuel prices up across the Union.

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