Overview
Brussels is preparing to loosen state aid restrictions next week to give member states more room to shield consumers and hard-hit industries from higher energy costs attributed to the ongoing war involving Iran. The proposals are framed as temporary, precisely targeted interventions meant to limit strain on public finances. Yet nine European finance officials and analysts have warned that a combination of existing untargeted relief measures and rising political pressure could transform short-term fixes into large, persistent fiscal commitments if the conflict continues.
Political and fiscal context
European economies enter this shock with limited fiscal leeway, facing what amounts to a third major disruption in six years - following the COVID-19 pandemic and the energy shock triggered by Russia's invasion of Ukraine. Governments are under electoral pressure to blunt the impact of higher prices, with national votes scheduled next year in France, Italy, Spain, Poland, Finland, Greece and Slovakia. That political calendar increases incentives for broad-based relief measures rather than narrowly targeted support.
As Alfred Kammer, head of the International Monetary Fund's European Department, put it: "After the pandemic and the Russian gas shock, populations now expect governments to step in whenever a crisis hits. This crisis comes from outside and affects the entire globe, but there is still an expectation of bailouts."
Existing measures and their scale
According to the Jacques Delors Energy Centre, 22 of the EU's 27 member states have already rolled out protective policies amounting to more than 10 billion euros. Those interventions range from cuts to value-added tax and excise duties to postponed price increases and explicit price caps. Notable national measures cited include 3.5 billion euros in energy VAT reductions in Spain and a 1.6 billion euro energy tax cut in Germany.
Think tank Bruegel assesses that many of these policies rely heavily on untargeted fuel tax cuts rather than measures directed only at the most vulnerable households or sectors.
One senior euro zone finance official emphasised the challenge of re-establishing fiscal discipline once measures are in place: "Despite what many governments say, these measures are not really temporary, because they are likely to stay in place until the crisis is over, which could be a long time. Some of the COVID 'temporary' measures are still in place."
Immediate energy impact and Commission calculations
The International Energy Agency has described the current situation as the worst energy crisis the world has faced. Disruptions to Middle East oil and gas supplies have already raised the EU's collective fossil fuel import bill by 24 billion euros in the first 50 days of the war, according to the European Commission.
Brussels has proposed several measures intended to improve resilience without incurring excessive recurring costs. The Commission put forward changes to electricity taxation rules, plans to coordinate the summer refill of gas storage facilities across member states and is examining possible obligations for governments to hold jet fuel stockpiles. These measures aim to reduce vulnerability to future price shocks while avoiding blunt, costly actions that only offer immediate relief.
Loosened state aid rules and targeted support
At the same time, the Commission is set to relax state aid regulations, with new provisions to be applied retroactively to March and to run until the end of 2026. The revised rules would permit governments to subsidise energy-intensive inputs - such as fuel and fertiliser - for sectors identified as hardest hit, including farming, fishing and road transport.
Energy Commissioner Dan Jorgensen acknowledged the political realities that will drive national decisions: "I understand that national circumstances and pressure will lead to decisions being made that you would not normally make. We understand, and we will even help facilitate it in some instances, but we do have to insist that it is very targeted and that it is temporary."
Price outlook and fiscal implications
The Commission's outlook suggests gas prices - which have risen by about a third since the U.S. and Israel launched their war on Iran - could remain elevated for up to two years. Oil prices, it says, may stay high for months even if the conflict ends quickly and the Strait of Hormuz reopens.
Analysts warn that the cumulative fiscal cost of emergency measures can grow rapidly. "The fiscal bill of these emergency measures quickly adds up to very large sums," said Elisabetta Cornago, an analyst at the Centre for European Reform.
Phuc-Vinh Nguyen of the Jacques Delors Energy Centre called for coordinated demand-reduction measures across the EU to alleviate pressure on supply and prices, observing that continued untargeted support would strain public budgets. "We have more fiscal and budgetary constraints .... It will be unsustainable for public finances in the very long term," Nguyen said.
Outlook
Brussels faces a policy choice between accommodating national political pressures with broader, shorter-term relief, and insisting on narrowly targeted, time-limited support while pushing reforms to strengthen energy resilience. The Commission's forthcoming rules aim to strike that balance, but officials and analysts caution that prolonged conflict could turn episodic intervention into significant and lasting fiscal obligations.
Note: Currency conversion used in reporting - $1 = 0.8559 euros.