Individual member states have implemented merely a patchwork of measures

As the war with Iran, involving Israel and the US, escalates, governments in Europe appear to be underestimating its ongoing and future damaging economic impact. Already, the war has triggered much higher energy and related prices that are reducing real disposable incomes of households and raising business costs. Furthermore, the mounting structural damage to production and export terminal facilities in the Middle-East is most likely to diminish substantially the growth in the supply of fossil fuels over the medium to longer-term and create possible energy shortages in the face of rapidly rising electricity consumption.

In reacting to the effects of higher energy prices on their economies, most governments in Europe, including Cyprus, have responded slowly and inadequately in taking action to protect their citizens and businesses from the economic impact of the war. Furthermore, with the real prospect of energy shortages looming, owing to disruptions in moving the past production of oil and natural gas through the Strait of Hormuz and the current production infrastructure being damaged, governments generally are falling short in devising robust contingency plans and in implementing timely, essential investments in energy infrastructure.

European Union

After some two weeks into the war, EU leaders instructed the European Commission to “present without delay a toolbox of targeted temporary measures to address the recent spike in the prices of fossil fuels”. Subsequently, European Commission president Ursula von der Leyen laid out options for the commission to explore. And apart from promising temporary tweaks to EU’s carbon emissions system (ETS) she “passed the buck” to leaders of EU member states to take measures, such as reducing taxes on energy products and providing subsidies to struggling households and industries.

However, so far in spite of the likelihood of energy prices remaining very elevated, most EU members have not acted with haste in agreeing to and even adopting the recommendations of the commission. In particular, leaders are split on how to deal with the EU’s carbon emissions trading system (ETS), which requires power plants and industries to buy permits to cover CO2 emissions. Von der Leyen had suggested that the price of buying these permits, which account for around 11 per cent of the cost of European industries’ power bills, should be lowered in the short term. But, some leaders notably Italy’s Giorgia Meloni and Poland’s Donald Tusk demanded deeper changes, including more free CO2 permits for industry, while others, including leaders of Spain and the Netherlands, opposed weakening the system and reducing incentives for diversification into renewables. However, with EU leaders wrangling over this issue it appears that nothing will be done on the pricing of CO2 emissions permits until a commission review of the ETS takes place in July 2026.

Furthermore, owing to limited fiscal space and promises to substantially raise defence spending, most EU governments have indicated a reluctance to substantially reduce taxes on energy products or provide subsidies so as to significantly lower energy costs for households and businesses.

Among the large EU members, only Spain to date has introduced a substantial and targeted package of measures costing around €5 billion with 80 measures aimed at curbing the adverse effects of high energy prices. VAT on all types of energy have been decreased from 21 to 10 per cent, including motor fuels, electricity and natural gas. And the most exposed workers of farmers, transport drivers and fishermen will receive a rebate of 10 cents for every litre of fuel purchased.

In other EU countries that have taken measures to contain energy prices, such action has been mainly very short-term and horizontal. For example, in France the private company, “Total Energy”, capped prices on petrol and diesel until the end of the month.

What is concerning is that the packages of measures being devised by EU members to date to cushion the impact of rising energy prices are not being sufficiently directed to mitigating substantially the faultlines in the economy between low and high-income households, which have been exacerbated by the fallout from the war with Iran.

And of equal concern at least is the current tendency of EU leaders to downplay the possible lasting and deeper effects of the conflict in the Middle East, especially of that on energy security. Indeed, the European Commission appears somewhat complacent in just stating that “its climate change strategy to replace fossil fuels with locally produced renewable and nuclear energy will ensure energy security and lessen the vulnerability of countries to volatile fuel prices”.

In truth, EU leaders do not appear to be in a hurry to support the essential investments in infrastructure required to ensure the sustained, reliable and affordable supply of energy throughout the union. Undeniably, electricity grids need to be upgraded and expanded with cross-border interconnectors as well as integrated with supplies of renewables. Moreover, such modernisation of electricity grids should be of greater urgency in the face of rapidly increasing electricity consumption, including the surging demand from data centres primarily driven by the rapid adoption of Artificial Intelligence, so as to prevent future periodic energy shortages among EU members.

Cyprus

In most recent years the Cyprus government has not used its considerable fiscal space and ample financial resources to adequately support low-income households and smaller businesses. Indeed, such fiscal restraint has contributed to widening income inequalities. In fact, the latest Eurostat data for Cyprus show that inequality between lower-income and higher-income households increasing markedly, with the Gini coefficient rising to 31.2 in 2025 compared with 29.0 in 2022, the latter being the year before the election of President Christodoulides. Furthermore, the data reveal that over 18 per cent or nearly one in five households in Cyprus ran the risk of poverty in 2025.

And surely, given the government’s abundant financial reserves and the adverse impact of the war with Iran hurting the economy, with low-income workers and smaller businesses being hardest hit, the Cyprus authorities had the opportunity and resources this month to deliver a package of support measures that would counter significantly and equitably the adverse effects of surging prices and costs on the finances of households and businesses, and the economy generally

But alas, the package of eight new support measures, entailing mainly reductions in taxes on energy products announced by President Christodoulides on March 26 to help cushion the economy against the adverse effects emanating from the war with Iran is grossly inadequate. While the government had reserves of over €6 billion in bank deposits at the end of February the cost of the new support measures is a mere €100 million, amounting to under 0.3 per cent of GDP.

Furthermore, the tax reductions and subsidies provided will lessen only modestly the impact of the higher prices of motor fuels and fertilisers. For example, the excise tax on motor fuels is to be decreased by 8.33 cents per litre for the months of April to June, yet the price of petroleum had by March 26 risen by 20.30 cents per litre since the start of the war. And while farmers will be subsidised to the extent of 15 per cent of their costs of fertilisers, the prices of such inputs are reported to have increased by over 30 per cent since end-February.

Moreover, in responding to the consequences of the Iran war, the Cyprus authorities, rather than serving most of the local households and businesses with an adequate and socially oriented package supporting domestic incomes and demand, have prioritised attracting foreign tourists in the face of airline disruptions and security concerns by among other things subsidising airlines and wages of hotel employees.

In addition, in the wake of a missile from Iran or Hezbollah hitting the British base at Akrotiri on March 2 the Cyprus authorities have focused on prolifically advertising Cyprus as a safe place for foreign tourists and that the island is functioning normally so as to keep external demand buoyant and offset weakening domestic demand and, thus, drive the economy.

While Cyprus has the financial resources at least to deal with short-term adverse effects arising from the war with Iran, the probable medium to longer-term consequences of this conflict is exacerbating and exposing the lack of resilience of the Cyprus economy.

Previously, it was stated that the over-emphasis of the Cyprus authorities in maintaining fiscal stability, has been at the expense of achieving longer-term economic resilience and meeting basic infrastructure needs, which are inextricably linked, as high-quality infrastructure serves as the backbone for sustained economic growth and a cohesive society.

Most importantly, with Cyprus relying heavily on the import of fossil fuels, investing relatively little in renewables, and suffering from extremely lengthy delays in completing projects to produce and distribute natural gas from offshore fields and upgrade and connect its electricity grid with those overseas, the country is very vulnerable to energy shortages. Indeed, the cost of inaction in effectively not completing energy projects is most likely to be felt in the lack of energy resilience over the longer-term.

Also, there are concerns that with the considerable dependence of Cyprus entities on Greece and Israel to supply refined oil products, such as many service stations relying mainly on petroleum imports from Haifa, the shorter-term energy security of the country is in question.

Although, the duration and breadth of the conflict in the Middle-East and its impact on Europe remain uncertain it can be concluded at this stage that most European leaders seem to underestimate the lasting damage being caused to their economies from the war with Iran and, consequently, that they are responding inadequately with remedial measures and policies.

More specifically, governments are falling short in financially protecting lower-income households and smaller businesses hardest hit the impact of the war with Iran. And, most importantly, EU leaders seem to downplay the longer-term adverse effects on their economies from disrupted, undiversified, and unaffordable energy supplies, and are failing in promptly taking action and making contingency plans to prevent possible, crucial energy shortages in their countries.