BRUSSELS ― Europe’s leaders have a new fear: Donald Trump’s standoff with Iran is about to turn from an economic shock into a political crisis for the bloc’s fragile center.
With energy prices climbing and growth sputtering, pro-EU governments are bracing for a crisis they have little power to stop — and that could rip through the bloc’s already weakened political mainstream.
Across Europe, unpopular incumbents are facing a populist backlash that could strike hard enough next year in France to propel National Rally to victory, putting the far right in the Élysée Palace and sending shockwaves around the world.
“Energy costs are cascading into food, transport and housing, hitting lower- and middle-income households hardest,” Seamus Boland, president of the European Economic and Social Committee, which brings together trade unions from across Europe and advises the European Commission on economic and labor policy, told POLITICO. “Politically, that creates space for distrust — not just of national governments, but of European institutions’ ability to shield citizens from external shocks. It risks accelerating support for more protectionist or inward-looking approaches.”
France is the biggest prize. But it is not the signal in Europe that the center is crumbling.
In Bulgaria, the April 20 victory of Kremlin-friendly ex-president Rumen Radev has set incumbents around Europe on edge. In Romania, a coalition crisis could soon sweep pro-EU Prime Minister Ilie Bolojan from power. In Germany, the far-right Alternative for Germany is eyeing gains in September’s Saxony-Anhalt state election, having already broken into parts of western Germany far from its traditional eastern power base.
The Iran war will be in focus on Monday as deputy finance ministers from the EU’s 27 governments meet in Athens to discuss how to cushion the bloc from the economic fallout without plunging it into a debt crisis, according to two EU diplomats with knowledge of the preparations. Their bosses, the finance ministers, will pick up the debate next week in Brussels, as treasuries begin the arduous task of drafting national budgets for next year.
Alarm bells
When European leaders held a two-day summit in Cyprus last week as economy chiefs and experts convened in Greece, a common thread was prominent in private meetings, informal conversations and public statements: Europe’s economy is already weak, and the Iran shock threatens to make it politically explosive.
“As the blockage of Strait of Hormuz persists, it’s clear that its impacts are becoming more pronounced and also, some say, spreading through the broader economy,” European Commissioner for Economy Valdis Dombrovskis told POLITICO on the sidelines of the Delphi Economic Forum in Greece. “Our advice is to stay with temporary and targeted measures also to limit their fiscal impact, because fiscal space is now more limited already since Covid-19 and since the first energy crisis [triggered by Russia’s full-scale invasion of Ukraine] in 2022.”
The standoff between Washington and Tehran is dragging on after recent talks were canceled at the last minute. The Strait of Hormuz remains closed to most commercial shipping traffic, keeping the price of oil trading above $100 per barrel.
The U.S. and Israel-led attacks are the latest — and most acute — trigger for Europe’s economic red alert. But the alarm bells have been ringing for years.
Europe was at risk of “slow agony” unless leaders undertook far-reaching reforms to catch up with faster-growing China and the U.S., former European Central Bank chief Mario Draghi warned in 2024.
“We should not underestimate that this is a unique moment where a U.S. president, a Russian president, a Chinese president are dead against the Europeans,” French President Emmanuel Macron said in Athens on Friday where he held talks with Greek Prime Minister Kyriakos Mitsotakis following the EU summit. “So, this is the right moment for us to wake up.”
In a sign of growing financial strains, both leaders used their meeting to call for spreading out the repayment of the EU’s post-pandemic recovery plan and for more EU debt to finance the bloc’s investment priorities.
Downgrading economic forecasts
The economic sluggishness that has haunted Europe for years is turning into something more urgent: stagflation. Rising prices caused by the war and blockade are colliding with weak growth across the bloc.
Once seen as temporary, the crisis is now expected to have longer-lasting effects and is spreading through the wider economy, Dombrovskis said.
“We are facing stagflation — economic slowdown and increased inflation at the same time,” he told POLITICO. “It is almost certain that we will have to revise our [full-year] economic forecast down in our spring forecast in the second half of May.”
Germany and Italy — together representing more than a third of the EU’s total GDP — have both downgraded their full-year economic forecasts in recent days.
At last week’s summit, EU leaders reviewed proposals from the Commission to soften the blow from the energy crisis, including electricity tax cuts, social schemes for vulnerable households, VAT reductions, targeted subsidies for clean technologies, investments in energy grids and coordinated gas storage refills.
But there is only so much Brussels — or cash-strapped national governments — can do.
Many EU countries are still laboring under high debt loads and deficits left over from pandemic-era economic support programs. That leaves little room for the kind of sweeping intervention Europe deployed during the as Covid took hold or after Russia’s full-scale invasion of Ukraine.
Dombrovskis said the Commission was holding off on bazooka-style measures and urging governments to stick to “targeted, temporary” support — in other words, to intervene only where the pain is most acute.
‘Idiotic’
The economic gloom is also reopening one of the EU’s oldest fault lines: the fight between frugal northern countries and southern states demanding more support from Brussels.
Negotiations over the EU’s €1.8 trillion budget for 2028–2034 have become a battleground. Northern countries want to rein in spending and shift more money toward defense. Southern countries argue they need economic support. Looming over the talks is another bill: From 2028, the EU is due to start repaying €25 billion a year on the joint debt it issued to tackle the economic fallout from the Covid pandemic.
“We got indebted during Covid. Today some tell us that we need to reimburse fast,” Macron said on Friday. “It is idiotic.”
Nektaria Stamouli and Giorgio Leali contributed reporting from Athens.
