The European Commission is weighing whether to grant member states additional fiscal flexibility to cushion the impact of high energy costs linked to the Iran war, in a move that could reopen a politically sensitive debate over the credibility of the EU’s fiscal framework.
According to a Reuters report citing Bloomberg News, the plan under discussion would allow governments to spend around 0.3 per cent of GDP on energy-related measures outside the EU’s normal fiscal rules. Reuters said it could not immediately verify the report.
The issue has acquired added urgency after Italy publicly pressed for a positive response from Brussels. Italian Foreign Minister and Deputy Prime Minister Antonio Tajani told Corriere della Sera that Rome’s request for energy-related budget flexibility was “absolutely legitimate”, and said he was confident the EU would respond favourably. Italy wants energy spending to receive treatment comparable to the leeway already available for defence expenditure under the EU fiscal framework, according to Reuters.
The request places Brussels in a difficult position. The EU only recently reformed its economic governance rules, which entered into force in April 2024 after years of debate over debt reduction, investment needs and national discretion. The Council of the EU describes the framework as a system intended to ensure sustainable public finances while supporting growth and investment. A new exemption for energy costs would test how far that framework can be stretched in response to external shocks.
Italy argues that the present circumstances justify flexibility. Rome is heavily dependent on imported energy and has been among the member states most exposed to higher prices caused by instability in the Gulf and disruption risks around the Strait of Hormuz. Tajani said any leeway could remain in place until market conditions stabilise, including shipping flows through key energy routes.
The question for Brussels is whether such flexibility would be limited, investment-focused and temporary, or whether it would set a wider precedent for national spending exemptions. Several Italian newspapers reported that the Commission could respond as early as Wednesday, with approval potentially conditional on the money being used for investment rather than subsidies.
That distinction matters. Investment in energy infrastructure, efficiency, storage or supply security could be presented as strengthening Europe’s resilience. Direct subsidies to households or companies would be more politically immediate, but would also risk weakening the fiscal framework by allowing governments to offset current costs through higher deficits.
The comparison with defence spending is central to Italy’s case. Under the EU’s national escape clause for defence expenditure, member states can temporarily deviate from budgetary requirements to increase defence investment in response to security threats. The Council says that such flexibility is available for four years from 2025, with annual excess spending not exceeding 1.5 per cent of GDP, while still requiring debt sustainability.
Italy is now effectively arguing that energy security has become a comparable strategic priority. Prime Minister Giorgia Meloni warned in May that Italy could reconsider participation in the EU’s SAFE defence scheme unless Brussels granted additional room for energy-related expenditure. That links two separate EU policy pressures: defence readiness and energy affordability.
The macroeconomic background is different from the energy shock that followed Russia’s full-scale invasion of Ukraine in 2022. A Reuters analysis of 175 eurozone company earnings calls found that only about a third of major firms had raised, or planned to raise, prices in response to higher energy costs linked to the Iran war. That is far below the proportion seen after the 2022 shock, when stronger demand and broader fiscal support helped push inflation into double digits.
The same analysis suggested that weak consumer demand is limiting companies’ ability to pass higher costs on to customers. Industrial and raw-materials firms appear more able to increase prices than consumer-facing companies. This may ease some pressure on the European Central Bank, but it does not remove the political pressure on governments facing higher energy bills, transport costs and business complaints.
For the Commission, the immediate decision is technical but the political consequence is wider. If Brussels permits energy spending outside normal fiscal calculations, it will acknowledge that the Middle East conflict has created a budgetary shock large enough to justify exceptional treatment. If it refuses, governments such as Italy’s are likely to argue that EU rules are too rigid to deal with external crises that affect households and industry directly.
The decision will also be watched by more fiscally conservative member states, which have traditionally resisted broad exemptions from deficit rules. Their concern is likely to be that every new carve-out reduces the credibility of the post-2024 fiscal framework, particularly in high-debt countries.
Brussels has tried to balance these competing pressures by allowing targeted flexibility where it can be justified by exceptional circumstances. Defence has already received that treatment. Energy may now become the next test of whether the EU’s revised fiscal rules can remain credible while responding to shocks beyond Europe’s control.
