Senior economic officials of the European Union have, for the first time, publicly acknowledged the risk of stagflation. Ongoing military conflicts in the Middle East and the resulting surge in energy prices are putting significant pressure on Europe’s economy, simultaneously accelerating inflation and slowing GDP growth.

On Monday, the European Commission warned of potential negative consequences for the region’s economy. The rise in energy costs is affecting all sectors of the European economy, including businesses and households, leading to a combination of sluggish economic growth and high inflation. As a result, Europe is experiencing a stagflationary shock.

Stagflation is considered one of the most challenging macroeconomic phenomena, often associated with the severe crises of the 1970s triggered by the Arab oil embargo. At the same time, representatives of the Eurozone noted that the current situation is characterized by stagflationary trends, which is reflected in revised forecasts showing lower economic growth and higher inflation. However, there are currently no signs of full-scale stagflation.

There are also differing assessments of the situation among other European institutions. Last week, the European Central Bank stated that the term “stagflation” refers to the 1970s and should not be used to describe the current state of the Eurozone.

The exact scale of the economic impact will become clearer in the coming weeks. This month, the European Commission plans to publish updated macroeconomic forecasts. The economic consequences will depend on how the conflict develops and its effects on energy supplies and infrastructure. It is noted that EU economies are now better prepared for energy shocks compared to the crisis of 2022.

European leaders are paying particular attention to issues of fiscal discipline. The European Commission and the European Central Bank maintain that government support measures for households and businesses should be temporary, targeted, and individualized. The broad subsidies used during the pandemic and the 2022 gas crisis are no longer being applied.