The need to be prepared for the most difficult scenarios was underlined by the President of the Eurogroup, Kyriakos Pierrakakis, following the conclusion of the Eurozone Finance Ministers’ Council today in Brussels.

“Citizens feel the pressure in their daily lives, especially the most vulnerable,” he noted, pointing out that businesses operating in a particularly demanding environment are under similar strain. He stressed that “our responsibility towards them is to be prepared even for the most difficult scenarios,” making special reference to the possibility of a prolonged disruption in the Strait of Hormuz, which could further weigh on economic activity.

As he emphasized, addressing such crises requires close European coordination, which he described as a “necessary precondition” for effectively managing critical issues.

Despite the challenges, the President of the Eurogroup highlighted that Europe has strong foundations: “The eurozone has demonstrated its resilience,” while inflation had been close to target before the latest shock and the labor market remains strong, with historically low unemployment. “This is our foundation, and on it we build with planning, consistency and responsibility,” he added.

Referring to support measures, he noted that member states are acting in a coordinated manner, emphasizing the Commission’s recommendation that these should be “targeted and temporary,” in line with fiscal rules and the objectives of the Green Transition. “Maintaining this balance is not easy, but it is absolutely necessary,” Pierrakakis acknowledged.

He made special reference to the conclusions of the International Monetary Fund, noting that “when measures are not targeted, they ultimately benefit the rich far more than the poor.” As he stressed, this constitutes “an important policy lesson” and confirms the line followed by the European Commission. According to the IMF, he said, “around 70% of the total cost of the 2022 measures was either not targeted or distorted prices,” while he warned about inequalities in energy subsidies, where if not properly designed, they may disproportionately benefit higher-income groups.

In conclusion, Pierrakakis emphasized the importance of the energy transition, noting that European households have already benefited from improved energy efficiency and the shift to renewable energy sources. As he stressed, the EU is strengthening its strategy for energy independence by investing in clean energy, interconnections and common networks, pointing out that “current developments show that we must accelerate.”

Asked whether we are in stagflation, Pierrakakis replied that “we are in a stagflationary trend,” but not in full stagflation at this point. As he noted, growth forecasts are being revised downward and inflation upward, confirming the pressure faced by European economies.

For his part, the Commissioner for Economy, Valdis Dombrovskis, acknowledged that what Europe is facing today is a “stagflation shock,” meaning a slowdown in economic growth combined with rising inflation. Referring to the latest data, he stressed that inflation in the eurozone stands at 3%, largely due to rising energy prices, which have increased by 10.9% year-on-year, further weighing on economic activity.

Dombrovskis underlined that “as a result of the war in the Middle East, energy prices have surged,” with oil exceeding $125 per barrel. As he said, higher energy prices affect every aspect of the European economy, businesses and households, putting the EU “on a path of weaker growth and higher inflation.” He added that “the overall outlook remains extremely uncertain,” with more details expected in the Commission’s spring economic forecasts to be published later this month.

In a more optimistic tone, Dombrovskis noted that “our economies are now better prepared to absorb the energy shock compared to 2022,” pointing out that after the Russian invasion of Ukraine, Europe has diversified its gas supplies and accelerated the development of renewable energy sources.

Referring to the policy response, he stressed that the war “will have serious consequences for Europe’s public finances” and underlined that “sound public finances are a key advantage for maintaining macroeconomic stability.” As he noted, fiscal room for maneuver is already limited due to higher deficits, increased interest rates and the need for higher defense spending.

“We cannot repeat the mistakes of the past,” he said, stressing that support measures must be “temporary and targeted” and must not increase overall energy demand – a position also reiterated by the International Monetary Fund. Concluding, Dombrovskis said that the Commission is closely monitoring developments and “remains ready to adjust its policy response if necessary.”

Finally, the head of the European Stability Mechanism (ESM), Pierre Gramegna, warned of increased uncertainty and pressure on markets. As he noted, “in recent weeks market reactions appeared overly optimistic,” however progress on reopening the Strait of Hormuz has slowed, leading again to rising oil prices. At the same time, he pointed out that sovereign bond spreads in the eurozone are widening, albeit at a slower pace than in March, stressing that “even if the conflict is resolved soon, its economic consequences will last longer than the conflict itself.” He also warned that a sharper repricing by markets could further tighten financial conditions, negatively affecting growth and further limiting already narrow policy space.