Europe Needs Bold Economic Action in the Face of the Iran Shock

Commentary by Max Bergmann and Federico Steinberg

Published March 27, 2026

In early 2020, outside of the small cadre of experts focused on pandemics, few geopolitical or market analysts anticipated the massive global disruption that was to come from a novel virus in China. As the war in Iran upends global energy markets and supply chains, most analysts, as well as markets, seem to anticipate the war ending soon and the global economy returning to normal. Yet increasingly, and worryingly, much of the Middle East expert community is warning that the war has no clear path to ending in the short term. The United States looks to have "no good options," as Iran may be able to keep the Strait of Hormuz closed to commercial traffic indefinitely. The European Union will be heavily impacted by a prolonged disruption of energy flows and needs to develop a bold, comprehensive plan of action now.

Europe and the world should begin preparing for the massive economic fallout from the war. Already, despite the enormous uncertainty, the Organisation for Economic Co-operation and Development is projecting that economic growth in the eurozone (which was already weak) will go down to only 0.8 percent in 2026, while inflation will accelerate more than 0.5 percent to over 2.5 percent this year. Should energy disruption continue, the impact will compound, potentially making this energy crisis worse than oil shocks of the 1970s.

It is now clear that, for Europe, decarbonization is no longer just a climate imperative; it is a matter of energy security. This means developing bold policy approaches that balance the acute needs of the moment-sustaining economic activity and helping the most vulnerable-with the longer-term interests of the European economy: decarbonization, competitiveness, and productivity growth. Just as the European Union responded to the economic crisis from Covid-19 with a revolutionary program-NextGenEU, a €750 billion program to spur economic recovery-the bloc should again be ready to act at a similar scale.

Not Europe's First Energy Crisis

Europe experienced a major energy crisis just four years ago when Russia invaded Ukraine and natural gas flows to Europe virtually stopped. Yet one lesson from the 2022 crisis was that the European economy was far more resilient than many expected. At the beginning of the crisis, a top German bank lobby said Germany would experience a depression if it lost access to Russian gas. Yet that did not occur. Europe had agency and acted, through tremendous fiscal transfers to industry and consumers, as well as by shifting to liquified natural gas (LNG) imports from the United States and Qatar. Germany and Europe got through the crisis without experiencing an economic downturn. Overall, European economic growth slowed, but a combination of national and European measures, increased savings, and supply diversification ensured that a recession was avoided.

After Russia invaded Ukraine, European policymakers reduced reliance on Russian gas from 40 percent to less than 10 percent in 2023. Europe now relies on more diversified supply, but this supply is both more expensive and still, as evident by the Iran war, exposed to geopolitical disruption. LNG now supplies 60 percent of European gas imports, up from 24 percent in 2021. Yet reliance on imported LNG has meant wholesale European energy prices are about three times higher than they were prior to the war. Europe transformed itself from dependence on Russian pipelines to dependence on U.S. and Qatari LNG, a shift that offered geopolitical advantages but still left Europe vulnerable to external supply shocks. Europe spent enormous sums bailing out industries dependent on fossil fuels and funding other schemes that, while mitigating the short-term impacts of the crisis, worsened Europe's fiscal position and reinforced dependence on expensive external sources of energy.

However, after the crisis, Europe did not just buy LNG-it also massively expanded its deployment of renewable energy. As a result, the European Union is much better prepared to cope with an oil and gas shock than four years ago or compared to the 1970s. Wind and solar energy increased from about 20 percent to 30 percent of the bloc's energy mix between 2022 and 2025, overtaking fossil energy as the largest source of electricity generation in Europe. Yet the rate of increase has now begun to level off.

Cometh the Hour, Cometh the Bloc

With gas prices once again rising dramatically-almost doubling since the start of the war-and oil prices likely to remain above prewar levels for months to come, combined with the prospect of higher interest rates due to higher inflation, Europe needs a bold approach to support its economy, mitigate the impact on citizens and businesses, and build long-term energy security.

Calls to weaken the energy transition, such as by removing long-term decarbonization targets, make little sense and will do nothing to address the present crisis. Instead, Europe needs to pursue the transition as fast as possible. If this latest crisis proves anything, it is that for Europe, decarbonization is no longer just a climate imperative; it is a matter of hard energy security.

Yet there are no magical solutions. In a stagflationary environment, every economic response comes with trade-offs. Additionally, Europe's fiscal capacity has been put under strain by the response to Covid-19, the energy crisis, and the war effort in Ukraine. Yet in this case, a fiscal response that spurs reduction in oil and gas consumption can serve to bring down inflation as well as spur demand for Europe's sputtering manufacturing sector.

First, Europe should push forth a new fiscal package to spur electrification and cope with the China export shock. Europe should seek to dramatically reduce oil and gas demand by creating consumer subsidies to buy electric vehicles (EVs), install heat pumps, and replace gas appliances. Some of these measures already exist in member states, but a push from Brussels (and the EU budget) is needed to accelerate their deployment, particularly in the bloc's poorer regions. The electrification of the European economy has remained flat, even as there has been a massive expansion of renewables. European governments, backed by the European Union, should introduce further incentives across these areas. Specifically, these measures should encourage consumers to choose European products over Chinese alternatives, particularly in the EV sector, which is currently undergoing a structural transformation.

This would both reduce oil and gas consumption through an incentives program (based on income), as well as support European manufacturing. It would broadly be equivalent to aspects of the Biden administration's Inflation Reduction Act and greatly complement the European Union's industrial policy strategy. For example, in Bulgaria, the poorest country in the European Union, over 70 percent of vehicles on the roads exceed fifteen years in age, while only 4.6 percent of cars are less than five years old. Bulgaria also has the lowest EV adoption percentage in the union. The European Union could provide support for a subsidy scheme for European EVs to modernize the vehicle fleet and provide resources to build out EV charging. Just as EU structural funds and cohesion funds sought to spur catch-up growth, this funding should focus on spurring modernization of the bloc's lagging regions. But that will also have tremendous industrial benefits for the European automotive sector, particularly in Germany. Since motor gasoline and gas/diesel oil added together made up almost 90.0 percent of the energy consumption in road transport in the European Union in 2023, far ahead of renewables and biofuels at 6.7 percent, rapidly electrifying this sector could dull the inflationary impacts.

Second, Europe must prepare Ukraine for a long war with Russia. The Iran war is of tremendous financial and military benefit to Russia. The increase in energy prices, as the Kyiv School of Economics concludes, may almost completely cover the costs of the war for Russia this year. Russia was looking at an incredibly bleak fiscal picture, with Russian oil selling at a cut rate of $40 a barrel. Now, with oil over $100 per barrel and the lifting of U.S. oil sanctions, Russia will be flush with cash. The ongoing negotiations have little to no prospect of success, especially since whatever economic incentives existed to negotiate an end to this war are gone. Meanwhile, the massive expenditure of munitions in the Middle East, especially for air defense, will leave Ukrainian forces and cities incredibly vulnerable, as the United States is unlikely to prioritize Ukraine or Europe with its limited production capacity. The burden of supporting Ukraine is currently falling on northern European countries with the fiscal capacity to back it. Backing Ukraine's war effort should be a shared responsibility across the European Union. Thus, issuing joint Eurobonds for Ukraine to create a common pot of funding will more equitably share the financing burden across the bloc, as interest payments come from the EU budget, which countries contribute to by percentage of their GDP. Alternatively, the European Union could still seize Russia's frozen assets to support Ukraine and ramp up European defense industrial production.

Third, Europe should forge a true European energy union and finance grid modernization and interconnections. The energy sector remains fractured along national lines, creating tremendous market inefficiencies across Europe. Addressing this remains politically difficult, as the lack of interconnection may at times narrow benefits to certain countries with lower energy prices. But it also creates serious vulnerabilities for Europe and reduces European resilience in the event of a military conflict. For instance, energy prices in Spain are on average substantially lower than in northern countries due to the depletion of renewable energies (mainly wind and solar). However, France, seeking a competitive advantage, has historically blocked Spanish efforts to connect its significant energy capacity to the rest of Europe. Wholesale energy prices vary significantly across Europe, creating massive distortions in the single market. Efforts are underway by the European Union to modernize and improve grid connections. But the bloc should both dramatically increase the funding it is providing as well as push for rapid, expedited construction. When the 2022 energy crisis hit, Germany, in a matter of months, constructed the infrastructure needed to import LNG. Europe should adopt a similar approach in renewable and battery deployments, providing expedited permitting and approvals. Additionally, the European Union should rapidly expedite permitting for the expansion of renewables, nuclear, batteries, and new energy production.

The current crisis in the Middle East is a reminder that Europe's economic and geopolitical security remains dangerously threatened by external shocks. Tinkering at the margins or hoping for a swift return to the prewar status quo is no longer a viable strategy. To confront these compounding threats, member states must overcome their historical hesitations and embrace European joint financing, as they did to address the Covid-19 pandemic and finance Ukraine's war effort. Whether through issuing additional Eurobonds or significantly expanding common EU funds, Europe must marshal collective financial firepower to accelerate this transition, sustain Ukraine against an emboldened Russia, and finally build a true European Energy Union less dependent on fossil fuels. Europe proved remarkably resilient during the 2022 energy crisis, but navigating this new era of global instability requires moving from ad hoc, national-level mitigation to bold, collectively financed action. The time for magical thinking has passed; the time for a fortified, electrified, and financially unified Europe is now.

Max Bergmann is the director of the Europe, Russia, and Eurasia Program and the Stuart Center in Euro-Atlantic and Northern European Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Federico Steinberg is a visiting fellow with the Europe, Russia, and Eurasia Program at CSIS.

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