European Commission Warns of Stagflation Amid Iran War Shock

The European Commission downgraded its 2026 economic growth projections for the eurozone to 0.9 percent and the broader European Union to 1.1 percent, citing a stagflationary shock caused by the conflict in Iran. The economic downturn followed the closure of the Strait of Hormuz, which pushed oil prices above 100 U.S. dollars per barrel and triggered a sharp surge in energy costs. This disruption caused eurozone inflation to hit 3% in April 2026 and is projected to reach 3.1% for the year, exceeding the European Central Bank's 2% target.

Business activity contracted at its fastest pace since October 2023, with France experiencing the most severe decline. Germany's 2026 growth forecast was slashed to 0.6 percent due to high energy prices and U.S. tariffs. In response, the Commission urged member states to implement temporary and targeted fiscal measures. However, Italy pushed to exclude fuel price support from EU deficit calculations to protect households and industry.

The European Central Bank faces a policy dilemma, balancing deteriorating growth against rising input cost inflation. While President Christine Lagarde rejected the term stagflation, the bank's severe scenario projects inflation could reach 4.8 percent by 2027. Consequently, markets expect an interest rate hike at the June 11 meeting to anchor inflation expectations. International Monetary Fund Managing Director Kristalina Georgieva warned that the conflict could permanently scar the global economy.