With rising energy prices resulting from the Iran war and slowing economic growth, European leaders face new fears about a shift from an economic shock to a political crisis, threatening the 'fragile' center of the European Union, especially amid stalled negotiations between US President Donald Trump and Iran, as reported by Politico magazine.

Across Europe, governments that lack popular support face a wave of populist backlash that could peak next year in France, potentially pushing the National Rally party to victory, placing the far-right in the Élysée Palace, which would have repercussions worldwide, according to the magazine.

Seamus Boland, head of the European Economic and Social Committee, which brings together unions from across the continent and advises the European Commission on economic and labor policies, said, 'Energy costs are being passed on to food, transport and housing prices, and low- and middle-income households are the most affected.'

He added, 'Politically, this creates room for distrust, not only in national governments but also in the ability of European institutions to protect citizens from external shocks. This risks accelerating support for a more protectionist or inward-looking approach.'

Potential Political Shifts

France remains the biggest prize, but it is not the only indicator in Europe of the erosion of the political center, according to Politico in its European edition.

In Bulgaria, the victory of former president and Kremlin ally Rumen Radev on April 20 raised concern among established governments across Europe. In Romania, a coalition crisis could soon remove pro-EU Prime Minister Ilie Bolojan from power.

In Germany, the far-right Alternative for Germany (AfD) party is eyeing gains in the Saxony-Anhalt state election scheduled for next September, after already expanding into parts of western Germany away from its traditional strongholds in the east.

The Iran war file will be at the top of the agenda on Monday when deputy finance ministers from the 27 EU governments meet in Athens to discuss ways to mitigate its economic impact on the bloc without pushing it into a debt crisis, according to European diplomats briefed on the preparations for Politico.

Finance ministers will continue the discussion next week in Brussels, as treasury ministries begin the arduous task of preparing national budgets for next year.

Iran Shock

In private meetings, informal conversations, and public statements made during a two-day summit in Cyprus last week, held alongside a gathering of economic officials and experts in Greece, a common view prevailed that Europe's economy is already weak, and the 'Iran shock' threatens to turn it into an explosive political crisis.

In remarks to Politico on the sidelines of the Delphi Economic Forum in Greece, European Commissioner for Economy Valdis Dombrovskis said, 'The continued closure of the Strait of Hormuz makes its effects more visible, and according to some, even leads to their spread into the broader economy.'

He added, 'We recommend sticking with temporary and targeted measures to limit their fiscal impact, because fiscal space has become more limited since the coronavirus pandemic and since the first energy crisis caused by the Russian invasion of Ukraine in 2022.'

The confrontation between Washington and Tehran continues after last-minute talks were canceled, while the Strait of Hormuz remains closed to most commercial shipping traffic, keeping oil prices above $100 per barrel.

Economic Preparedness

The Iran war is the latest and most potent trigger for a state of maximum economic preparedness in Europe, but alarm bells have been ringing for years.

In 2024, former European Central Bank President Mario Draghi warned that Europe faces a 'slow agony' unless leaders undertake sweeping reforms to catch up with faster-growing China and the United States.

French President Emmanuel Macron said in Athens on Friday, after talks with Greek Prime Minister Kyriakos Mitsotakis, 'We should not underestimate that this is a unique moment when an American president, a Russian president, and a Chinese president are all against Europeans... It is the right time to wake up.'

In a sign of mounting financial pressure on Europe, the two leaders during their meeting called for spreading out the repayment of the post-pandemic European recovery plan over a longer period and for issuing more European debt to fund the bloc's investment priorities.

Downgrading Economic Forecasts

The recession that has plagued the European economy for years is turning into 'stagflation,' as price increases caused by the war and the closure of the Strait of Hormuz collide with weak economic growth across the bloc.

Dombrovskis told Politico that the crisis, previously seen as temporary, is now expected to be longer-lasting and to spread into the broader economy.

He added, 'We are facing stagflation, an economic slowdown and rising inflation at the same time.' He added, 'It is almost certain that we will have to lower our economic forecasts (for the full year) in the spring forecast in the second half of May.'

Both Germany and Italy, which together account for more than a third of the EU's gross domestic product, have lowered their full-year economic forecasts in recent days.

During last week's summit, EU leaders reviewed proposals from the European Commission to ease the energy crisis, including reducing electricity taxes, launching social programs to support the most needy families, cutting value-added tax, providing targeted subsidies for clean technologies, investing in energy grids, and coordinating the refilling of gas reserves.

But the capacity of Brussels, or financially burdened national governments, remains limited.

Many EU countries, according to Politico, still suffer from high levels of debt and deficits accumulated since the economic support programs during the coronavirus pandemic, leaving narrow room for broad interventions like those seen in Europe during the pandemic or after the Ukraine war.

Dombrovskis noted that the Commission refrains from adopting massive financial measures and urges governments to commit to 'targeted and temporary' support, i.e., intervening only in the most affected areas.

North-South Confrontation in Europe

The gloomy economic conditions reopen one of the oldest fault lines within the European Union, the conflict between fiscally hawkish northern countries and southern countries demanding more support from Brussels.

Negotiations on the EU budget, worth €1.8 trillion for the period 2028-2034, have become a battleground, with northern countries seeking to curb spending and channel more funds to defense, while southern countries assert their need for economic support.

Another burden looms on the horizon, as the European Union is scheduled to start repaying about €25 billion annually from 2028 of the common debt it issued to counter the fallout of the coronavirus pandemic.

Macron said on Friday, 'We borrowed during the Covid pandemic. Today some tell us we have to repay quickly... That is ridiculous.'