European economies have little fiscal room as they face a third economic shock in six years, after the COVID pandemic and an energy crisis triggered by Russia’s invasion of Ukraine

International News via Reuters:

When the European Union outlines looser state aid rules next week to help governments cushion the blow from energy prices driven higher by the Iran war, it will pitch targeted measures aimed at avoiding further strain on fragile public finances.

But Reuters spoke to nine European finance officials and analysts who warned that steps such as fuel duty cuts and price caps already rolled out in many states, combined with voter pressure as right-wing populists gain ground, risk ballooning state aid and fiscal costs if the war drags on.

European economies have little fiscal room as they face a third economic shock in six years, after the COVID pandemic and an energy crisis triggered by Russia’s invasion of Ukraine. Yet governments are under pressure to shield consumers from rising prices, with elections due next year in France, Italy, Spain, Poland, Finland, Greece and Slovakia.

“After the pandemic and the Russian gas shock, populations now expect governments to step in whenever a crisis hits,” the head of the International Monetary Fund’s European Department, Alfred Kammer, told Reuters.

“This crisis comes from outside and affects the entire globe, but there is still an expectation of bailouts,” he said.

According to the Jacques Delors Energy Centre, 22 out of the EU’s 27 countries have already introduced protective measures costing more than 10 billion euros ($11.7 billion), ranging from VAT and excise tax cuts to delayed increases and price caps.

Those measures – including 3.5 billion euros in energy VAT cuts in Spain and a 1.6 billion euro energy tax cut in Germany – rely largely on untargeted fuel tax cuts, according to think tank Bruegel.

“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,” one senior euro zone finance official said.

The International Energy Agency says the conflict is the worst energy crisis the world has faced. Disruption to Middle East oil and gas supplies has added 24 billion euros to the EU’s collective fossil fuel import bill in the first 50 days of the war, according to the European Commission.

KNEE-JERK REACTIONS VS STRUCTURAL REFORMS

The Commission on Wednesday proposed changes to electricity taxation, coordinating the summer refill of gas storage and possible obligations for states to hold jet fuel stockpiles.

It is wary of costly knee-jerk reactions that provide blunt short-term relief but fail to deliver structural changes to cushion future energy price shocks.

However, it is also set next week to loosen state aid rules, retroactive to March and running until the end of 2026, allowing governments to subsidise fuel and fertiliser prices in the hardest-hit sectors, including farming, fishing and road transport.

Some analysts warn that governments will struggle to withdraw support if the war persists.

“I understand that national circumstances and pressure will lead to decisions being made that you would not normally make,” Dan Jorgensen, the EU’s Energy Commissioner and a former energy minister for Denmark, told Reuters.

“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,” he said.

The Commission expects gas prices, up about a third since the U.S. and Israel launched their war on Iran, could remain high for two years, with oil prices elevated for months even if the conflict ends soon and the Strait of Hormuz reopens.

“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 think tank.

Phuc-Vinh Nguyen, of the Jacques Delors Energy Centre, urged EU-wide action to reduce energy demand to ease pressure on supplies and prices.

“We have more fiscal and budgetary constraints …. It will be unsustainable for public finances in the very long term,” Nguyen said.

($1 = 0.8559 euros)

Reporting by Kate Abnett and Jan Strupczewski. Editing by Mark Potter

State television broadcast footage overnight of masked troops pulling up in a grey speedboat alongside the MSC Francesca, climbing a rope ladder to a shell door in the hull and jumping through brandishing rifles

International News via Reuters:

Iran showed off its tightened grip over the Strait of Hormuz on Thursday with video of its commandos storming a huge cargo ship, after the collapse of peace talks that Washington had hoped would open the world’s most important shipping corridor.

State television broadcast footage overnight of masked troops pulling up in a grey speedboat alongside the MSC Francesca, climbing a rope ladder to a shell door in the hull and jumping through brandishing rifles.

The footage, presented with an action-movie-style soundtrack and no commentary, also included views of another ship, the Epaminondas. Iran claimed to have captured both on Wednesday, accusing them of trying to cross the strait without permits.

The vice speaker of parliament, Hamidreza Hajibabaei, said the first revenue from a toll that Iran was now collecting from ships using the strait had been transferred to the central bank’s account. He gave no further detail about who had paid it, when or how much.

Iran’s judiciary chief Gholamhossein Mohseni-Ejei said the merchant vessels attacked in the strait had “faced the law”. Iranian speedboats and marine drones were sheltering in sea caves off an island near the mouth of the strait and keeping the U.S. Navy from approaching.

PAKISTAN STILL IN TOUCH WITH SIDES ABOUT TALKS

Iran, which has effectively blocked the strait to ships apart from its own since the United States and Israel launched the war in February, has been left in apparent control of the waterway since last-ditch peace talks were called off on Tuesday, hours before a two-week ceasefire expired.

Tehran says it will not consider opening the strait, normally the route for a fifth of global oil and liquefied natural gas, until the U.S. lifts a blockade of Iran’s own shipping, which Washington imposed during the ceasefire and Tehran calls a violation of that truce.

The U.S. military has intercepted at least three Iranian-flagged tankers in Asian waters and is redirecting them away from their positions near India, Malaysia and Sri Lanka, shipping and security sources said on Wednesday.

U.S. President Donald Trump cancelled threats to restart attacks on Iran in the ceasefire’s final hours on Tuesday, but has refused to lift the blockade. There has been no formal extension of the ceasefire, and no plans have been announced for further talks.

Iranians, who endured six weeks of U.S. and Israeli bombardment before the ceasefire on April 8, described a nerve-wracking environment under the threat of renewed warfare.

“In a situation that is neither peace nor war, things are somewhat frightening. At every moment, you think that Israel or the U.S. might launch an attack,” Arash, 35, a government employee in Tehran, told Reuters by phone. “You cannot make decisions about the future in such a situation.”

Pakistan, which hosted the only peace talks of the war earlier this month and had been preparing to host a second round before it was called off on Tuesday, was still in touch with both sides, a Pakistani government source said.

The Pakistani source said Iranian officials were still declining to commit to sending a delegation, citing the U.S. blockade and other reasons.

“Yesterday, diplomats from various countries met different Pakistani authorities and asked about the expected dates for the next round of talks, but they could not give them any timeframe, clearly,” the Pakistani source said.

Iran has said publicly it is willing to talk in principle but that the U.S. blockade and inconsistent demands from Washington made it impossible to commit. The U.S. delegation led by Vice President JD Vance never left Washington.

“You did not achieve your goals through military aggression and you will not achieve them by bullying either,” the head of Iran’s negotiating team, Parliament Speaker Mohammad Baqer Qalibaf, wrote on social media on Wednesday. “The only way is recognizing the Iranian people’s rights.”

 The United States was separately due to host a second round of talks between Israel and Lebanon on Thursday, with Lebanon seeking an extension of a ceasefire reached last week in a war that has run in parallel to the Iran war.

Israeli strikes killed five people including a journalist in Lebanon on Wednesday, the deadliest day there since the U.S.-brokered truce took effect last week. Iran says maintaining the Lebanon ceasefire is a pre-condition for talks on the wider war.

U.S. NAVY SECRETARY FIRED

In the latest wartime shakeup at the Pentagon, John Phelan, a billionaire investor appointed by Trump as secretary of the navy, was ousted late on Wednesday. Two sources told Reuters he had been fired over disagreements around shipbuilding and bad relations with officials including Defense Secretary Pete Hegseth.

The stalemate in the strait has left markets whipsawed by mixed signals. The lack of a clear path to resolving the worst energy disruption in history sent oil prices climbing again, but with fighting on hold Wall Street share prices have zoomed to record highs.

On Thursday, shares were down in Japan, Hong Kong, Britain and Germany, but up in South Korea and flat in France. Futures markets forecast an easing on Wall Street from Wednesday’s record close. Brent crude was up more than 1.5% at $103.50 a barrel.

So far, the U.S. has not achieved the aims Trump set out at the war’s start: to deprive Iran of the capability to attack its neighbours, end its nuclear programme and make it easier for its people to overthrow their government.

Iran has retained missiles and drones that can hit its neighbours, and a stockpile of highly enriched uranium estimated by the U.N. atomic watchdog at more than 400 kg (900 pounds). Its rulers, who killed thousands to put down a popular uprising in January, have faced no organised opposition since the war began.

And they have added new leverage by seizing control of the strait despite threats from Trump, who posted on social media earlier this month: “Open the Fuckin’ Strait, you crazy bastards, or you’ll be living in Hell – JUST WATCH!”

Reporting by Reuters bureaus; Writing by Peter Graff, editing by Keith Weir