WASHINGTON — The European Union’s top economic adviser is warning the world that stagflation, a slowing of economic growth combined with rising inflation, may be on the horizon due to the ongoing hostilities between the United States and Iran.
“We had done some scenario analysis on the economic implications of war in Iran,” Valdis Dombrovskis, the European Commission’s Commissioner for Economy and Productivity and former Prime Minister of Latvia, told Breitbart News in an exclusive interview on Tuesday morning blocks away from the White House.
Dombrovskis had presented in late March to a Eurogroup press conference in Brussels warning about negative impacts economically of the war in Iran, and now he is taking his message to the U.S. capital to warn Washington.
“Obviously, the extent of implications is linked with how long the conflict will last — how big the disruptions for oil and gas sector are going to be — so our estimates therefore range on the negative economic impact for EU growth somewhere between 0.2 and 0.6 percent and also with a simultaneous increase in inflation, which can go about one percentage point, again depending on the scenario,” Dombrovskis told Breitbart News.
“So, what we are facing is a stagflationary shock, so a simultaneous slowdown in economic growth and increase in inflation. So just for background, we were expecting economic growth in the EU to be around one and a half percent both this year and next prior to the war in Iran. In terms of policy response, one issue is obviously in the energy sector including we are working with the International Energy Agency on coordinated release of oil reserves. We are looking also at some adjustments to the energy market functioning in the EU to address short term implications in terms of fiscal policy response. As European Commission, our recommendation is for a temporary and targeted response, given also the fiscal restrictions which we are facing, and as a response which is not in a sense creating additional demand for oil and gas at the time where we should be reducing demand. And it has to be said that in that regard, the policy advice we are doing as a European Commission for EU member states is very much aligned with the policy response which IMF is recommending to the broader world, and we will hold I think several discussions on these three topics also during these IMF Spring Meetings here in Washington, DC.”
Dombrovskis is in Washington this week for the annual spring meetings of the International Monetary Fund (IMF) and the World Bank Group, held all week in the U.S. capital. The meetings this year come of course at a contentious time for the world economy as the planet’s gaze is turned yet again to the Middle East — specifically the Strait of Hormuz — as the war between the U.S. and Iran, while winding down, still has the strait threatened. As of now, President Donald Trump has ordered a U.S. naval blockade of the strait after Iran was bottlenecking the important waterway for weeks on end. That comes after the U.S. and Iranian talks in Islamabad, Pakistan, this past weekend failed to produce a lasting deal between the two nations but also in the aftermath of a ceasefire that saw the Iranians promise to open the Strait of Hormuz in exchange for a halt to U.S. bombings inside the Islamic Republic of Iran. The contentious situation is fast-evolving, and Trump has suggested according to some reports that an elusive deal may still be in the offing.
Dombrovskis, while in Washington, said he will meet with, among others, Treasury Secretary Scott Bessent.
“The policy advice we are giving on the economic policy responses is very much aligned with the IMF policy advice and we will have occasions to discuss it in various settings, obviously in IMF meetings themselves but then also going to have a G20 and G7 meeting, several other meetings,” Dombrovskis said. “So the topics of focus for this week, I would say, are exactly the question of the economic implications on war in Iran. But we continue to work on global economic imbalances across different work strands and also on it’s important not to lose the focus also on Russia’s war of aggression against Ukraine. So in several meetings I will be emphasizing this issue as well. So besides those various forums like IMF, G20, and G7, I also have a number of bilateral meetings, including with Treasury Secretary Scott Bessent, and also some meetings with centers.”
Dombrovskis told Breitbart News that the hope from the European side of things is “clearly” that the war with Iran comes to an end sooner rather than later, and he believes if that happens it will ease some of the economic concerns he is warning may lie ahead.
“Also from EU side, we are engaged in those diplomatic efforts to bring down escalation and to reach peace in the Middle East because the sooner we reach it less the negative economic inflations are going to be obviously,” Dombrovskis said. “It’s important to restore freedom of navigation in the Strait of Hormuz but also to make sure that the bombing of Iran’s neighboring countries is stopping, which is also targeting as we know oil and gas infrastructure in those countries and is affecting global supply.”
Dombrovskis added that more generally than just the Strait of Hormuz the global economy depends on freedom of navigation in seaways worldwide. “We also see it as a very important point that we need to restore this navigation, and we are engaged in the effort to do so,” he said. “It’s worth noting that we at the EU are also actively engaged in Red Sea to ensure that freedom of navigation is there, concerning the risk of Houthis’ attacks, so with that also in a sense active military presence there. Those concerns, I would say, have resurfaced right now in the context of war in Iran. So we say it is already a fundamental point where we need to work very intensively to make sure that we are ensuring this.”
More from Dombrovskis’s interview with Breitbart News, including specifics on where the U.S.-EU trade deal stands and points of agreement between the Europeans and Trump on China, is forthcoming.